The Co-Operative Bank Plc v Phillips

Mr Phillips is the chargor and the Co-operative Bank plc (“the Bank”) is the chargee under two charges of two residential properties owned by Mr Phillips. The charges in question were second charges ranking behind earlier charges in favour of Barclays Bank plc (“Barclays”). On 19 April 2013, the Bank brought proceedings by way of two separate claims for possession of the two properties asserting its right to possession as chargee of those properties. On 18 June 2014, the Bank served notice of discontinuance of both its claims. The Bank accepts that it is liable under the Civil Procedure Rules to pay to Mr Phillips his costs of the proceedings, which the Bank says should be the subject of detailed assessment on the standard basis.

The principal questions which I am now asked to decide are:

Mr Phillips has been, and is, the freehold owner of two residential properties, namely, Vole Farm, Vole Road, Mark, Somerset and Chestnut Farm, Vole Road, Mark, Somerset. Mr Phillips and his wife have throughout lived at Vole Farm. Chestnut Farm has throughout been occupied by Mr and Mrs Fussell and Mr and Mrs Tudor. Mrs Fussell is Mr Phillips’ sister. Mrs Tudor is Mr Phillips’ daughter.

Vole Farm has been, and is, subject to a first legal charge dated 15 November 2005 in favour of Barclays. Chestnut Farm has also been, and is, subject to a first legal charge also dated 15 November 2005, again in favour of Barclays.

By a loan agreement dated 19 April 2007, the Bank agreed to lend a sum in excess of £2.1 million to County Capital plc (“the company”), a company of which Mr Phillips was then a director. One of the terms of the loan agreement was that Mr Phillips would grant to the Bank a second legal charge over Vole Farm and a second legal charge over Chestnut Farm. A further term of the advance was that Mr Phillips would provide a capital guarantee in an amount of £290,000 and an interest shortfall guarantee in an amount of £550,000.

On 3 May 2007, the Bank entered into a loan agreement with Mr Phillips under which the Bank was to lend Mr Phillips a sum up to a limit of £1,790,000. Repayment of the loan was secured on two properties other than Vole Farm or Chestnut Farm.

By a guarantee dated 30 May 2007, Mr Phillips guaranteed to the Bank the payment of sums due to the Bank from the company up to a limit of £550,000 in respect of interest and a limit of £290,000 in respect of the principal sum due.

On 22 June 2007, Mr Phillips granted to the Bank a second legal charge over Vole Farm to secure the repayment of all monies due from the company to the Bank. Such monies were deemed to be due for the purposes of section 101 of the Law of Property Act 1925 on demand. By clause 9 of the charge, all costs charges and expenses incurred by the Bank and all other monies paid by the Bank in connection with the charge or the charged property were recoverable from Mr Phillips and/or the company as a debt and were to be charged on the charged property. Such costs were expressed to include all costs incurred by or charged to the Bank (on a full indemnity basis) in taking, perfecting, enforcing or exercising (or attempting to perfect, enforce or exercise) any power under the charge. In view of some of the submissions made to me I emphasise that the principal sums secured by the charge were owing from the company to the Bank and not from Mr Phillips to the Bank.

By a deed dated 22 June 2007, Mrs Phillips postponed any rights she may have had in Vole Farm to the rights of the Bank under the second legal charge of Vole Farm.

Also on 22 June 2007, Mr Phillips granted to the Bank a second legal charge over Chestnut Farm in the same terms as in the charge of Vole Farm.

By deeds dated 22 June 2007, Mr and Mrs Fussell and Mr and Mrs Tudor postponed any rights they may have had in Chestnut Farm to the rights of the Bank under the second legal charge of Chestnut Farm.

There was also a loan by the Bank to another company with which Mr Phillips was connected and a guarantee and the grant of security in relation to that loan. It is not necessary to set out the detail in relation to those matters.

On 30 July 2008, the Bank demanded re-payment from the company of a sum in excess of £2.2 million. There were also subsequent demands made by the Bank on the company. The company did not pay the sum demanded.

Also on 30 July 2008, the Bank demanded payment from Mr Phillips as guarantor of £840,000 (being £290,000 and £550,000). Mr Phillips did not pay the sum demanded.

On 15 December 2009, Mr Phillips made a proposal for an individual voluntary arrangement. The proposal was on terms that Vole Farm and Chestnut Farm were to be excluded from the IVA. Further, the proposal was not to affect the rights of any secured creditor to enforce its security. The statement of affairs, which accompanied the proposal, stated that Vole Farm had a value of £825,000 and the amount owed to Barclays under the first legal charge of Vole Farm was £986,689, so that there was negative equity of £161,689, even before considering the Bank’s second charge. The statement showed Chestnut Farm as having a value of £725,000 and the amount owed to Barclays under the first legal charge of Chestnut Farm was £821,794, so that there was negative equity of £96,794, even before considering the Bank’s second charge. The statement showed the Bank as a secured creditor for a sum in excess of £2 million. The statement also showed the Bank as an unsecured creditor in relation to Mr Phillips’ liability under the guarantee and possibly other matters.

Mr Phillips’ proposal for an IVA was accepted by his creditors on or about 10 January 2010. The IVA was to last for a period of 4 years from 10 January 2010 to 10 January 2014.

I have referred to the fact that the statement of affairs prepared for the IVA stated that the amounts due to Barclays which were secured on Vole Farm and Chestnut Farm exceeded the then value of those properties so that both were the subject of negative equity.

From around June 2012, the Bank threatened to bring possession proceedings in relation to Vole Farm and Chestnut Farm. Mr Phillips responded by again asserting that, taking account of the sums owed to Barclays and secured by the first charges over those properties, the properties were the subject of negative equity and no sum could be realised if the Bank was to attempt to sell the properties. Mr Phillips wrote letters to the Bank making this point on 5 September 2012, 4 October 2012 and 8 January 2013.

On 19 April 2013, the Bank brought two sets of proceedings against Mr Phillips in the Weston-super-Mare County Court. One set related to Vole Farm and the other to Chestnut Farm. Apart from the identity of the relevant property, the two sets of proceedings were in the same terms and I will refer to them together rather than separately.

In each case, the sole claim was for possession of the relevant property. The claim forms stated that the claims for possession were because the Bank wished to exercise its power of sale of the charged property. Paragraph 10 of each Particulars of Claim pleaded that the Bank’s power to sell the charged property had arisen and the Particulars of Claim then stated that the Bank relied on paragraphs 1 to 10 as the ground on which it was asking for possession of the charged property.

Paragraph 13.1 of the Particulars of Claim stated that the relevant property was the subject of a first legal charge in favour of Barclays but that the Bank was not aware of the extent of the indebtedness.

On 31 May 2013, Mr Phillips served a witness statement in response to the proceedings. He referred to the statement of affairs which accompanied the proposal for the IVA which had stated that there was negative equity in the two properties by reason of the first legal charges to Barclays. He also stated that the extent of the negative equity was significantly greater than that shown in the statement of affairs.

On 17 June 2013, Mr Phillips served a single Defence and Part 20 Claim in the two sets of proceedings. The Defence and Part 20 Claim raised many issues not all of which I need to describe. The Defence addressed the claim to possession in a number of ways. It was pleaded that the parties had made a certain agreement which meant that the Bank was not entitled to pursue its possession claim. It was also said that any order for possession should be suspended for the duration of the terms of the first legal charges in favour of Barclays. In that regard, it was pleaded that the debt due to Barclays charged on Vole Farm exceeded the value of Vole Farm by £510,000 and the debt due to Barclays charged on Chestnut Farm exceeded the value of Chestnut Farm by £500,000; the Defence sought to explain why these figures for negative equity were greater than the comparable figures in the statement of affairs which accompanied the proposal for the IVA.

On 5 July 2013, the Bank served a witness statement in response to the earlier witness statement of Mr Phillips. The Bank’s witness statement did not refer to the topic of negative equity which had been raised by Mr Phillips.

On 7 August 2013, Mr Phillips was ordered to pay the Bank its costs summarily assessed in the sum of £6,952.50 in relation to a preliminary issue raised by Mr Phillips which he then conceded. The effect of this order is that Mr Phillips is not able to recover from the Bank his own costs in relation to that matter and when I refer in this judgment to Mr Phillips being entitled to his costs against the Bank, that comment does not include the costs of this particular matter.

On 27 September 2013, Mr Phillips issued an application notice seeking an order that the claims for possession be struck out or dismissed as an abuse of process. The application was supported by his second witness statement dated 27 September 2013. In that witness statement, Mr Phillips gave evidence that the value of Vole Farm and Chestnut Farm were significantly below the sums which he owed to Barclays which were the subject of the first legal charges over Vole Farm and Chestnut Farm in favour of Barclays. He stated that the Bank had not contacted Barclays to ascertain the position in this respect before bringing the proceedings for possession. He said this was because the purpose of the proceedings was to pressurise him into giving up all resistance to the Bank’s overall enforcement strategy. He then suggested that the financial position of the Bank itself was putting immense pressure on the Bank to maximise its recoveries from debtors and this pressure was causing the Bank to act irrationally in relation to the present claims to possession. He then said that if the Bank was to contend that it was acting properly in bringing possession proceedings, he sought disclosure from the Bank of a number of identified classes of documents.

On 12 November 2013, the Bank served a witness statement in response to Mr Phillips’ application to strike out the proceedings. This witness statement pointed out that Mr Phillips had not pleaded in his Defence that the proceedings were an abuse of process. The statement then said that the Bank was entitled to seek possession pursuant to its second legal charges and once it had possession it was not obliged to sell the properties immediately. Instead, it was said, the Bank could rent the properties out and derive an income for its benefit before any sale.

Mr Phillips’ application to strike out the claims was heard by Deputy District Judge Roach on 14 November 2013. The claims were not struck out but Mr Phillips was given permission to serve an amended Defence pleading the alleged abuse of process and he was ordered to pay the Bank’s costs.

On 4 December 2013, Mr Phillips served an amended Defence which pleaded the allegation that the proceedings for possession were an abuse of process. It was pleaded that the Bank would obtain no legitimate commercial advantage from enforcing the second legal charges and, in consequence, the proceedings were an abuse of process. It as also said that the claims for possession were for a collateral purpose to pressurise Mr Phillips and his family in order to gain an unfair advantage in a wider dispute between Mr Phillips and the Bank and that purpose was foreign to the permissible purposes of possession proceedings.

On 29 April 2014, His Honour Judge Cotter QC allowed an appeal from the Deputy District Judge’s order made on 21 November 2013. Judge Cotter held that it had not been necessary for Mr Phillips to plead in his Defence the allegation that the proceedings were an abuse of process before making his application to strike out the proceedings on that ground. The costs of the hearing on 21 November 2013 were reserved and the Bank was ordered to pay the costs of the appeal which were assessed in the sum of £14,448.50 plus VAT of £2,822.70. The Bank was also ordered to give disclosure, by 9 June 2014, of the documents which had been identified by Mr Phillips as relevant to the Bank’s decision to bring the proceedings for possession. The Bank was also ordered, by 9 June 2014, to serve any further evidence on which it wished to rely in response to Mr Phillips’ witness statement of 27 September 2013. Finally, the order provided for the proceedings to be transferred to the High Court.

Although I have seen a letter dated 15 May 2014 which referred to an Amended Reply and Defence to Part 20 Claim, I was not shown that pleading.

On 29 May 2014, the court gave notice that the application dated 27 September 2013 would be heard on 14 July 2014.

The Bank did not comply with the order for disclosure by 9 June 2014, or at all. The Bank did not serve any further evidence in response to Mr Phillips’ witness statement of 27 September 2013. On 18 June 2014, the Bank served a notice of discontinuance in relation to the whole of the claims.

The Civil Procedure Rules provide for the costs consequences of a claimant serving a notice of discontinuance. By CPR 38.6, unless the court orders otherwise, a claimant who discontinues is liable for the costs which a defendant (against whom a claimant discontinues) incurred on or before the date of service of the notice of discontinuance. CPR 44.9 provides that in such a case a costs order is deemed to have been made on the standard basis. This deeming provision is subject to the power of the court to order otherwise under CPR 38.5(3) and 38.6(1).

The Bank does not seek to avoid the effect of the deeming provision that it is liable to pay Mr Phillips’ costs on the standard basis. However, Mr Phillips submits that it is appropriate in all the circumstances of this case for the court to order that he should recover his costs on the indemnity basis. Mr Phillips puts his application for costs to be on the indemnity basis on two grounds. The ground which he put forward in advance of the hearing was that the Bank’s claims to possession were an abuse of the process of the court. At the hearing, Mr Phillips refined this submission into two separate strands. The first strand involved the contention that the Bank was seeking possession of the properties for a collateral purpose which was beyond the Bank’s powers as a chargee of the properties. The second strand was that the Bank’s claims to possession were an abuse of the process of the court.

Mr Phillips wished me to decide the questions arising as to collateral purpose or abuse of process in order to determine whether costs should be awarded on the indemnity basis. The Bank did not submit that I should not decide those questions. Nonetheless, I have had doubts in this case whether I should decide these questions in this case. In some circumstances, a court will take the view that it is not appropriate for it to decide questions which do not arise apart from the relevance of such questions as to matters of costs. I was not asked by either party to take that view in this case.

With some reluctance, I have concluded that I should determine the questions arising to the extent necessary to deal with the issue as to indemnity costs and so far as necessary to deal with the separate issue as to whether the Bank can add its costs (and the sums payable to Mr Phillips in relation to his costs) to its security. If the Bank had not discontinued the proceedings, then the questions as to collateral purpose and abuse of process would have had to be decided. The court had given directions for a hearing in relation to these questions. Before discontinuing these proceedings, the Bank, in breach of the court’s directions, did not give disclosure and, further, it elected not to serve any evidence on these questions. I consider that Mr Phillips might have a justifiable sense of grievance if the Bank could improve its position by failing to comply with the directions of the court and by choosing to discontinue the proceedings. Further, there is a live issue between the parties as to whether the Bank is entitled to add the relevant costs to its security. This issue arguably overlaps with the questions as to collateral purpose and abuse of process. Although the issue as to adding costs to the security was raised informally for decision, both parties ask the court to decide the issue and I will do so.

It is helpful to summarise some relevant principles as to the powers of a mortgagee before considering the arguments in this case.

Generally speaking, a mortgage confers on a mortgagee various powers such as a right to sell the security, a right to appoint a receiver and a right to take possession of the security. There are important equitable constraints as to when and how a mortgagee can exercise these powers. The position in equity was summarised by Lord Templeman in the Privy Council in Downsview Ltd v First City Corporation Ltd [1993] AC 295 at 312 F – G, as follows:

“Several centuries ago equity evolved principles for the enforcement of mortgages and the protection of borrowers. The most basic principles were, first, that a mortgage is security for the repayment of a debt and, secondly, that a security for repayment of a debt is only a mortgage. From these principles flowed two rules, first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower. These principles and rules apply also to a receiver and manager appointed by the mortgagee.”

In the quoted passage, Lord Templeman referred to the mortgagee’s powers being exercised for the purpose of obtaining repayment. Elsewhere in the same case he referred to the mortgagee’s powers being exercised for the purpose of “protecting the interests of the debenture holder in recovering the moneys due under the debenture” (313A), “for the special purpose of enabling the assets comprised in the debenture holder’s security to be preserved and realised” (314C – D) “for the purpose of protecting his security” (315B) and “for the sole purpose of securing repayments of the moneys owing under his mortgage” (317D).

I referred earlier to a mortgagee’s right to possession as if it were a “power” available to a mortgagee. It might also be said that the right to possession flows from the mortgagee having a legal estate in possession. It is conventionally said that a mortgagee has a right to go into possession “as soon as the ink is dry on the mortgage”. Indeed, the mortgagee’s right to possession may be exercised out of court provided that the taking of possession does not involve a contravention of the criminal law under section 6 of the Criminal Law Act 1977: see Ropaigealach v Barclays Bank plc [2000] QB 263. Nonetheless, it is clear that the mortgagee’s right to take possession of the mortgaged property is a right which it has in the capacity of a mortgagee, that is, having a security for the payment of a debt. In any case, it is established that a mortgagee’s right to take possession is subject to the same equitable constraints as apply to the other powers of a mortgagee.

In Quennell v Maltby [1979] 1 WLR 318, Templeman LJ said at 324:

“The estate, rights and powers of a mortgagee, however, are only vested in a mortgagee to protect his position as a mortgagee and to enable him to obtain repayment. Subject to this, the property belongs in equity to the mortgagor.”

In that passage, Templeman LJ referred specifically to the “estate” of a mortgagee as well as to the “rights and powers” of a mortgagee. In the same case, Lord Denning MR described the position in equity in wider (and perhaps too wide) terms but I consider that it is clear that the equitable constraint is at least as wide as described by Templeman LJ in that case.

Further, in Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013] UKPC 2, Lord Neuberger giving the judgment of the Privy Council referred to the “title” of the mortgagee at [73] in the following way:

“In equity, a mortgagee has a limited title which is available only to secure satisfaction of the debt. The security is enforceable for that purpose and no other: Quennell v Maltby [1979] 1 WLR 318, 322H (Lord Denning MR); Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 312G (Lord Templeman).

Difficulties can sometimes arise where the mortgagee has a number of reasons for seeking to exercise his powers or where the mortgagee hopes to achieve more than one purpose by doing so and where it is said that one such reason or purpose is not permissible. In Meretz Investments NV v ACP Ltd [2007] Ch 197, Lewison J held at [314] that:

“A dissection of a mortgagee's motives is likely to be difficult in practice. Moreover, unlike statutory powers conferred for the public benefit, or trustees' powers conferred for the benefit of beneficiaries (which were two analogies on which [counsel] relied) a mortgagee's powers are conferred upon him for his own benefit. In such circumstances “purity of purpose” may be difficult to achieve. The cases do support the proposition that a power of sale is improperly exercised if it is no part of the mortgagee's purpose to recover the debt secured by the mortgage. Where, however, a mortgagee has mixed motives (or purposes) one of which is a genuine purpose of recovering, in whole or in part, the amount secured by the mortgage, then in my judgment his exercise of the power of sale will not be invalidated on that ground. In addition I consider that it is legitimate for a mortgagee to exercise his powers for the purpose of protecting his security.”

The same point was made in Cukurova (cited above), where Lord Neuberger added at [73]:

“It follows that any act by way of enforcement of the security (at least if it is purely) for a collateral purpose will be ineffective, at any rate as between mortgagor and mortgagee.”

In Downsview, a debenture holder’s appointment of a receiver was not a proper exercise of the power of appointment where it was no part of the debenture holder’s purpose to recover the debt secured by the debenture; see the analysis of that decision in Meretz at [306]. In Quennell v Maltby it was held that the mortgagee was not entitled to take possession of the mortgaged property where it was no part of the mortgagee’s purpose to enforce the security for her own benefit: see the analysis of that decision in Meretz at [310].

In principle, a second mortgagee can sell the mortgaged property subject to a prior mortgage or can redeem the prior mortgage and sell the property free from the prior mortgage. However, if the amount due to the prior mortgagee exceeds the unencumbered value of the property, the second mortgagee will not be able in practice to sell the property for a positive figure, subject to the prior mortgage, and will not wish to use its own monies to redeem the prior mortgage.

A second mortgagee is entitled to possession of the mortgaged property, subject to the rights of a prior mortgagee. The court can make an order for possession in favour of the second mortgagee, subject to the rights of a prior mortgagee: see Berkshire Capital Funding Ltd v Street (1999) 78 P&CR 321. The same case establishes that if the first mortgagee grants a tenancy of the mortgaged property, the second mortgagee will be bound by that tenancy and will not be entitled to possession as against that tenant.

A second mortgagee in possession is entitled to grant a tenancy of the mortgaged property under section 99 of the Law of Property Act 1925 but it may be deprived of such a right by the terms of a prior mortgage excluding the power under section 99 to grant leases: see Julian S Hodge & Co Ltd v St Helens Credit Ltd [1965] EGD 143.

The way in which this question has been raised for the decision of the court, as described above, has made its determination somewhat difficult. Mr Phillips does not have direct evidence as to the Bank’s purpose in bringing these proceedings. The Bank had the ability to give the court direct evidence as to its purpose but has chosen not to do so. Indeed, by the time that the Bank discontinued these proceedings it had already failed to comply with an order that it give disclosure in relation to this point. In these circumstances, both sides ask me to draw inferences as to what had been the purpose of the Bank in bringing these proceedings.

Mr Phillips says that the Bank’s purpose cannot have been to sell the properties. He says that there was no equity in the properties available to the Bank. He says that there was no evidence that the Bank ever sought a valuation of the properties nor enquired of Barclays as to the amounts secured by the first charges. As to the suggestion that the Bank could have let the properties, it is said that this was a theoretical suggestion and there was no evidence that the Bank ever thought of letting the properties. It is further said that there was no evidence that there would have been any surplus of rents after the Bank had paid Barclays the interest due to Barclays under the first charges. Mr Phillips therefore submits that the Bank’s proceedings were either irrational due to the pressure on the Bank caused by its own unfavourable financial position or the Bank’s purpose was to put pressure on Mr Phillips to pay something towards the debt secured by the charges, which was not a debt due from him (as it was a debt due from the company), or to put pressure on members of Mr Phillips’ family to pay something towards the debt due from the company, which was not a debt due from the family members.

The Bank submits that I should find that it believed that there was equity available to it pursuant to its charges. The Bank does not put forward any evidence that it had that belief but it relies on correspondence passing between the parties in which the Bank expressed scepticism about Mr Phillips’ case that there was negative equity, based on the first charges to Barclays, and where the Bank asked for information about the values of the properties and about the amounts owed to Barclays. The Bank also submits that letting the properties would have been an option although the Bank does not put forward any evidence that that option was actually considered by the Bank. The Bank does not accept that its purpose was to put pressure on Mr Phillips to pay the debt due from the company but the Bank submits that if I were to find that this was indeed its purpose, then such a purpose would be a permissible purpose for claiming possession of the properties and not a collateral purpose.

On the evidence before me, at all material times, the values of both properties were significantly less than the sums owed to Barclays which were secured by the first charges to Barclays. The only evidence I have is from Mr Phillips and it is not contradicted by any evidence from the Bank. I am asked to draw an inference that the Bank believed that this was not the position. I have no evidence on which I could draw that inference. If the Bank did have that belief, it could have given evidence to that effect but it has not done so. The fact that it expressed scepticism about negative equity in letters to Mr Phillips does not establish that it believed that there was equity secured by the second charges to the Bank.

The result of the above conclusions is that I cannot find that the Bank believed that if it recovered possession of the properties it would be able to sell them and receive some net proceeds of sale which would serve to reduce the sum secured by the charges to the Bank. Accordingly, I cannot find that the Bank’s purpose in bringing the proceedings was to sell the properties in this way.

There is no evidence that the Bank contemplated letting the properties and so I do not think that I can find that the Bank’s purpose in claiming possession was to derive an income from letting the properties. The option of letting the properties was referred to in a witness statement by the Bank’s solicitor but even he did not say that that was something which the Bank actually wished to do. Nonetheless, I heard submissions as to what would have happened if the Bank had wanted to grant tenancies of the properties and I ought to deal with those submissions, albeit fairly briefly.

The first matter arising as to the possible letting of the property was whether the charges to Barclays contained terms which would have prevented the Bank granting tenancies binding on Barclays. Following the hearing, the solicitors for Mr Phillips provided me with a copy of the charge in favour of Barclays in relation to Chestnut Farm. I was not provided with a copy of the charge in favour of Barclays in relation to Vole Farm. The charge in relation to Chestnut Farm contained a standard form provision excluding the chargor’s powers of leasing, without the consent of Barclays. Counsel for the Bank objected to the admission of the Barclays’ charge into evidence. The objection was principally on the ground that there was no opportunity for the court to hear evidence as to the attitude of Barclays in the event of the Bank obtaining an order for possession. I agree that there was no evidence as to what Barclays would have done in such an event. However, as I understand it, I was asked to consider the Barclays’ charge for the limited purpose of establishing that it contained a qualified prohibition on letting the charged property. I think it is likely that I would have been prepared to proceed on the basis that that was the position, even without seeing a copy of the actual charge, as such a clause is a standard provision. However, this clause would not prevent the Bank actually granting a tenancy or tenancies but any such tenancy would not be binding on Barclays.

I also heard brief submissions as to the obligations of the Bank in relation to any income which it might have received from any tenancy it might grant in relation to the charged properties. If the Bank granted a tenancy with the consent of Barclays so that it was binding on Barclays, then it must have been likely that Barclays would take the income from such a tenancy as a condition of giving its consent. Further, Barclays could itself go into possession and take the income from such a tenancy.

Counsel for the Bank referred me to para. 29.54 of Fisher & Lightwood on Mortgages, 13^th ed., as setting out the legal position which would apply in the event that the Bank had granted any tenancy of the charged property. That paragraph discusses the liability of a mortgagee in possession to account for income from the mortgaged property. It is stated that the mortgagee should apply receipts, such as rents from the mortgaged property, in a certain sequence. As part of that sequence, it is stated that a second mortgagee should pay interest on a prior mortgage, then apply any surplus to payment of interest under the second mortgage and then apply any further surplus to repayment of capital under the second mortgage. It seems to me that that sequence would only apply if the first mortgagee allowed the second mortgagee to grant a tenancy without the first mortgagee going into possession itself of the income from the tenancy.

In any event, I was not given any evidence as to whether the likely income from tenants of the charged properties would have exceeded the suggested liability to account to Barclays for the interest due to Barclays.

I now turn to consider whether the Banks’ purpose was a more general one to put pressure on Mr Phillips and his family with a view to obtaining payment from someone in relation to the debts the subject of the charges and what the legal position would be in such a case.

Even if the taking of possession of the charged property would not have conferred a direct benefit on the Bank, by allowing it to sell or let the properties, the taking of possession by the Bank would have been disadvantageous to Mr Phillips and the other persons in possession. These disadvantages might have led to payments being made, by or on behalf of Mr Phillips, in respect of the sums the subject of the charges as a condition of the Bank refraining from taking possession of the properties. It would also have been open to Mr Phillips to offer to pay a sum to redeem the Bank’s charges, alternatively, open to a member of Mr Phillips’ family to offer to pay a sum in return for a transfer to him or her of the Bank’s charges. In this way, the Bank’s threat to take possession of the charged property might have led to a payment being made by Mr Phillips or a family member to avoid the Bank going into possession, in circumstances where such a payment would not be regarded as income received by a mortgagee in possession. Indeed, Mr Phillips’ other daughter (not herself in possession of either property) did offer £25,000 in relation to each charge in return for its redemption.

It would have been possible for Mr Phillips and his family members to avoid the threat of possession by the Bank if they had persuaded Barclays to exercise its powers to grant tenancies of the properties to Mr Phillips and/or his family members but there was no evidence that anyone considered that possibility.

Although counsel for the Bank did not accept that the Bank’s purpose in bringing proceedings for possession was to put pressure on Mr Phillips and his family to make a payment towards the sums the subject of the charges, she submitted that if that had been the Bank’s purpose then it would not have been a collateral purpose outwith the Bank’s powers. Counsel for Mr Phillips argued the contrary. He distinguished the case where the mortgagee’s purpose is to put pressure on a mortgagor who is a debtor of the mortgagee to pay a sum due from the mortgagor to the mortgagee from a case where the mortgagee’s purpose is to put pressure on a mortgagor, who is not himself a debtor of the mortgagee, to pay a sum due from a third party to the mortgagee, even though it is a sum repayment of which is secured by the mortgage.

I agree with counsel for the Bank that if the Bank’s purpose in claiming possession was to place Mr Phillips and his family at a disadvantage with a view to receiving an offer of payment of the sum secured by the charge, then that purpose is not collateral and is not outside exercise of the Bank’s powers as chargee. Such a purpose seems to me to be the purpose of obtaining repayment and the purpose of enforcing a security for such repayment. The legal principles to which I earlier referred recognise such a purpose as a proper purpose for the exercise of a mortgagee’s powers. In that case, I do not see any validity in the distinction made by counsel for Mr Phillips between a case where the charge secures repayment of a debt owed by the chargor and where the charge secures repayment of a debt owed by a third party.

Counsel for Mr Phillips submitted that if these claims for possession had gone to trial, the court would not have ordered possession because such an order would not be made in a case where the Bank could not show that taking possession would be of benefit to the Bank. He submitted that the Bank could not show it would receive any benefit from an order for possession when it could not show that it could sell the charged properties or derive an income from them. However, that submission ignores the fact that the Bank could argue that the disadvantage that an order for possession might impose on Mr Phillips and his family would be likely to produce an offer from Mr Phillips or a family member of payment of a part of the sums secured by the charges. Counsel for Mr Phillips relied on the decision in Albany Home Loans Ltd v Massey [1997] 2 All ER 609 which is authority for the proposition that it is generally not appropriate to order possession against one of two mortgagors where the order would be of no benefit to the mortgagee, particularly where the joint mortgagors were husband and wife. In such a case, an ordinary order for possession would be pointless if immediately it was complied with it, the joint mortgagor, who was allowed to remain in possession, simply granted the other joint mortgagor a licence to retake possession. In any event, the discussion in the Albany Homes case relates to a situation where it is clear that an order for possession would be of no benefit to the mortgagee. In the present case, the Bank could argue, for the reasons given earlier, that an order for possession would be of benefit to the Bank. The court might well think that the Bank’s decision to claim possession was harsh as compared with a typical mortgagee’s claim for possession but I do not think that the court could refuse to make an order for possession on that account.

Having considered the possibility that the Bank might have brought these proceedings to put pressure on Mr Phillips in the way described, I now need to determine what the Bank’s purpose was in bringing these proceedings. Although the Bank has not called any evidence as to its purpose, I do not consider that I should assume that it had no proper purpose. I consider that on the incomplete evidence which I have I must decide on the balance of probabilities what that purpose was. I am not able to decide that the Bank wanted to sell or let the properties. I am not persuaded that the Bank was acting irrationally and without any purpose at all. I consider that, on the balance of probabilities, the Bank brought the proceedings to put pressure on Mr Phillips which the Bank considered, or at any rate hoped, would produce some payment which the Bank would be able to appropriate to the sums secured by the charges. The Bank’s view was in the event borne out to the extent of the offer of £50,000 made by Mr Phillips’ daughter.

I also hold that the bringing of these possession proceedings for the purpose of putting pressure on Mr Phillips in that way was for the purpose of obtaining repayment of the sums secured by the charges and was therefore a permissible purpose.

In the light of my conclusion that the Bank’s purpose in claiming possession was within the equitable constraints on the exercise of its powers, I can take fairly shortly the second submission of Mr Phillips that the proceedings for possession were an abuse of process. It is established that proceedings which are brought for a “collateral purpose”, and not for the purpose for which such proceedings are properly designed and exist, are an abuse of process. The distinction between proceedings which are and are not abusive in this context was explained by Bridge LJ in Goldsmith v Sperrings Ltd [1977] 1 WLR 478 at 503D – H as follows:

“For the purpose of [the] general rule, what is meant by a “collateral advantage”? The phrase manifestly cannot embrace every advantage sought or obtained by a litigant which it is beyond the court's power to grant him. Actions are settled quite properly every day on terms which a court could not itself impose upon an unwilling defendant. An apology in libel, an agreement to adhere to a contract of which the court could not order specific performance, an agreement after obstruction of an existing right of way to grant an alternative right of way over the defendant's land — these are a few obvious examples of such proper settlements. In my judgment, one can certainly go so far as to say that when a litigant sues to redress a grievance no object which he may seek to obtain can be condemned as a collateral advantage if it is reasonably related to the provision of some form of redress for that grievance. On the other hand, if it can be shown that a litigant is pursuing an ulterior purpose unrelated to the subject matter of the litigation and that, but for his ulterior purpose, he would not have commenced proceedings at all, that is an abuse of process. These two cases are plain; but there is, I think, a difficult area in between. What if a litigant with a genuine cause of action, which he would wish to pursue in any event, can be shown also to have an ulterior purpose in view as a desired by product of the litigation? Can he on that ground be debarred from proceeding? I very much doubt it. But on the view I take of the facts in this case the question does not arise and it is neither necessary nor desirable to try to lay down a precise criterion in the abstract.”

Applying that test, I consider that proceedings by a chargee for possession of the charged property for the purpose of putting pressure on the chargor and the persons in possession of the charged property to make a payment towards the sums secured by the charge are not brought for a collateral purpose and are not an abuse of the process of the court. I therefore conclude that the Bank’s proceedings in this case were not an abuse of the process of the court.

I have now held that the proceedings for possession in this case were not outside the equitable constraints on the Bank’s exercise of its powers and were not an abuse of the process of the court. Counsel for Mr Phillips did not seriously argue that if I reached those conclusions, I should nonetheless award costs on the indemnity basis. I consider that in this case, in view of my earlier findings, the normal result that a discontinuing claimant should pay the defendant’s costs on the standard basis should prevail.

The Bank has incurred two sets of costs in connection with these proceedings. First, it incurred its own legal costs and, secondly, it is liable to pay Mr Phillips’ costs, pursuant to the specific order made on 29 April 2014 and pursuant to the deemed order for costs following discontinuance. The Bank relies upon clause 9 of the charges, which I have referred to above. The Bank says that both sets of costs were incurred by it in attempting to enforce or exercise any power under the charges. Mr Phillips did not suggest otherwise. The Bank therefore says that it is entitled to recover both sets of costs from Mr Phillips as a debt on a full indemnity basis and it is also entitled to recover interest on that debt.

In response to the Bank’s claim, Mr Phillips contended that as a matter of construction of clause 9 of the charges, the Bank was not entitled to recover from him any costs which had been unreasonably incurred or which were unreasonable in amount. He relied on the reasoning in Gomba Holdings Ltd v Minories Finance [1993] Ch 171. That case concerned a similar provision in a mortgage. The provision referred to all costs incurred by the mortgagee and stated that they could be recovered from the mortgagor on a full indemnity basis. The judgment of the Court of Appeal in that case was given by Scott LJ. He construed the relevant provision at pages 184 – 188. He held at page 187B that, as a matter of construction of the provision, the mortgagee was not entitled to recover any costs which were of an unreasonable amount or which had been unreasonably incurred. He held that the burden of showing that the costs were unreasonable in either respect was on the mortgagor and so that any doubts on those matters were to be resolved in favour of the mortgagee. He was influenced in reaching that construction by the definition of the indemnity basis of costs in Order 62 rule 12(1) of the Rules of the Supreme Court. That definition in the RSC is in substance the same as the current definition of indemnity costs in CPR 44.3.

I consider that clause 9 of the charges in the present case is to be construed in the same way as the relevant provision in Gomba Holdings. Thus, the Bank is not entitled to recover from Mr Phillips any costs incurred by it which were unreasonable in amount or which were unreasonably incurred. The burden of demonstrating that the costs claimed were unreasonable in either respect is on Mr Phillips so that any doubts are to be resolved in favour of the Bank.

I will now apply this interpretation of clause 9 to the facts of this case. I begin by considering the Bank’s own costs. Has Mr Phillips demonstrated that those costs were not reasonably incurred by the Bank? I have already made my findings as to the Bank’s entitlement to claim possession of the two properties which had been charged. I have held that the Bank did not act outside the equitable constraints on its power to take possession and its proceedings were not an abuse of the process of the court. However, the question whether its costs of the proceedings were reasonably incurred is not necessarily answered by these findings. The Bank got absolutely nothing out of these proceedings, which have been a waste of time and expense from its point of view. The Bank itself appears to have recognised that by discontinuing the proceedings. The Bank has not given evidence as to its reason for discontinuing the proceedings. The Bank submitted that I should infer that its reason was connected with various developments in relation to Mr Phillips’ IVA but in the absence of evidence from the Bank and in view of the lack of clarity as to what is happening in relation to the IVA, I am not able to draw that inference. In these circumstances, I conclude that Mr Phillips has shown that the Bank’s own costs of these proceedings were not reasonably incurred. They are, therefore, not recoverable under clause 9 of the charges.

The position is even more clear in relation to the second set of costs incurred by the Bank, namely, its liability to pay Mr Phillips’ costs on the standard basis. Just as the Bank’s own costs were unreasonably incurred for the purposes of clause 9, so too were the costs that the Bank has made itself liable to pay to Mr Phillips as a result of starting and then abandoning these proceedings.

These conclusions mean that the Bank is not entitled to recover from Mr Phillips either of the two sets of costs which it claims. These conclusions make it unnecessary to consider the further question as to whether the adverse orders of the court that the Bank should pay Mr Phillips’ costs would necessarily override the Bank’s contractual right (if it had one) to recover the self-same costs from Mr Phillips and thereby negate the effect of the court’s orders. That topic is considered in Gomba Holdings but in view of my earlier conclusions, it is not necessary to consider the point any further.

I record that there was no objection to the court at this stage determining this issue as to the meaning and application of clause 9 of the charges; it was not suggested that this issue had to be referred to a costs judge who would apply CPR 44.5.

The result of the above is that Mr Phillips is entitled to be paid by the Bank the costs which he incurred in these proceedings, to be assessed on the standard basis (insofar as they have not already been assessed). Mr Phillips has asked the Bank to agree that the Bank has no relevant right of set off of those costs against the liabilities which Mr Phillips had to the Bank, which liabilities are subject to the terms of Mr Phillips’ IVA.

There is plainly no right to a common law or equitable set off in this case. Clauses 7(1) and 7(2) of the Standard Conditions for IVAs, which apply to the IVA in this case, allow mutual credit and set off where before the commencement of the IVA there have been mutual credits, mutual debts or other mutual dealings between the Bank and Mr Phillips. Clause 7(4) provides that set off is not available in respect of any debt, other than in accordance with the provisions of clause 7. “Debt” is defined in the Standard Conditions by reference to section 382 of the Insolvency Act 1986, subject to necessary modifications to refer to a voluntary arrangement.

The Bank cannot invoke clause 7 of the Standard Conditions in this case. The Bank’s liability to pay Mr Phillips’ costs was not a debt, or the result of a dealing, before the commencement of the IVA. The IVA was entered into on 10 January 2010. The Bank subsequently brought its proceedings on 19 April 2013. An order for costs was made against the Bank on 29 April 2014 and the deemed order for costs against the Bank arose as a result of the Bank’s discontinuance on 18 June 2014.

As agreed at the hearing, I will hand down this judgment without the need for the parties to attend. I will adjourn all consequential matters and I will extend the time for appealing generally until the consequential matters are disposed of.

The matters which I understand will now need to be dealt with are: (1) the costs of the proceedings following discontinuance by the Bank; (2) whether I should make an order that the Bank should make a payment on account of its liability for Mr Phillips’ costs; and (3) directions as to Mr Phillips’ Part 20 claim. As to (2), I conclude that in principle I am prepared to make an order for a payment on account but that I should only do so when I have determined the position as to (1). As to (3), I understand that it is agreed that the Part 20 Claim should be stayed on terms which are not in dispute.

As to these outstanding matters, I direct that if they are not agreed between the parties, then the parties should make written submissions to me in accordance with the following timetable: (1) Mr Phillips’ submissions within 21 days of the hand down of this judgment; and (2) the Bank’s submissions in reply within 14 days thereafter.