Next time someone tells you there is no such thing as a bad day; you can prove them wrong with the verdict handed down on Cabot Financial Ireland (CF) in December 2021. It was the culmination of transactions and proceedings going back 17 years, with CF ultimately being told the €2.5 million debt they had bought was unrecoverable. That’s nearly £2.1 million at the presiding exchange rate that went to court for the purpose of debt collection, only for the claimant to fall on their sword.
How Do You get into €2.5 million of debt?
If you’ve ever bought a house or investment property, you’ll know it doesn’t come cheap without a good reason. The phrase ‘safe as houses’ stems from the Victorian era to describe low investment risk as property prices have continually risen over the centuries. The most notable recent exceptions were the house price crashes of 1995 and 2008 before recovery ensued. The €2.5 million debt, in this case, relates to property investments which bucked the trend of being safe-as. A property portfolio must generate revenue from commercial activity or residential letting, otherwise, repayment obligations and maintenance costs cannot be met. Normally we’d refer to the party owing money as the debtor, but the High Court ruling by Mr Justice Meenan (made public in January 2022) strips the father and son duo of liability. Instead, we’ll refer to them as the defendants. They sought to get the High Court claim dismissed when the case reached its 2021 climax.
Rules of Origin
The clock started 17 years ago when the first defendant (son) became indebted to Ulster Bank Ireland to fund property purchases. With the clock at 15 years ago and struggling to get sufficient return on investment to service the debt, restructuring was needed. As a parent there is innately very little one would not do to preserve their offspring’s wellbeing. The second defendant (father) became involved for just that reason. To obtain a credit facility vital to the restructuring, he signed a personal guarantee. The second defendant was now personally liable for up to €2.25 million of his son’s current and future liabilities. At the age of 63, the second defendant was eying a retirement that could be interrupted if the bank called in the multi-million-euro personal guarantee. Fast forward a few years with the clock now at 12 years ago and the father was once again brought back into the fold. He took out a personal loan in the hope of safeguarding his son’s wellbeing once again. The defendants were now indebted to the tune of €2.5 million.
In a 2013 affidavit (written statement signed under oath) the second defendant stated undue influence was imposed on him by his son in respect of signing the personal guarantee, and again when taking out a personal loan. Having advised Ulster Bank Ireland of this at the time, there was an obligation by the lender to cover themselves by way of safeguards. The second defendant also believed the bank failed to put in safeguards, provide sufficient advice or information on the loan. This amounted to duress. The exact content of discussions between the bank and defendants is unclear, and the nature of the discussion between father and son is rightly private. It would be distasteful to imply anything other than what Mr Justice Meenan made public.
Factoring (also known as debtor financing) is where a business sells the debt to a third party at a discounted rate in return for immediate payment. This helps a business meet a short term cash flow need. It’s not uncommon for a bank to sell loans to other banks or debt management companies. Debt always carries a risk of the lender not recouping the principal sum and any contractual interest due. Due diligence by an acquiring party is part of managing the risk and can be a complex process. For some lenders selling debt is part of their routine processes, and for others, it is done specifically for balance sheet purposes. The terms, conditions and cost of a loan remain unchanged when a debt is sold. When a debt is repaid or sold, those funds are repurposed for another borrower yielding further interest for the lender. Ulster Bank Ireland sold the €2.5 million debt with the clock 5 years ago before being transferred to the present owner and claimant 2 years ago.
When the Debt Dance Stops
The debt and personal guarantee were obtained through Ulster Bank Ireland (UB) who originally loaned €2.5 million to the defendants. With the clock at 9 years ago and the defendants had defaulted on payment, UB initiated court proceedings with a summons being issued. It wasn’t until 5 years ago UB sold the debt to Cabot Asset Purchases Ireland (CAP). With the clock at 2 years ago, the debt was then transferred to an associated company called Cabot Financial Ireland (CF). CAP and CF are part of a group of companies, and amongst other things specialise in managing and acquiring consumer debt. CF was ultimately holding liability when the debt dancing stopped and Mr Justice Meenan ruled. There is nothing to suggest they or CAP had a role to play in the defendants refinancing, personal guarantee, loan activities or advice. Nor is there anything to suggest any shortcomings of UB were anything other than an anomaly, or indicative of how the business operates.
The claim was dismissed on two grounds. The first was delays in progressing the matter to and through court (deemed an inordinate delay) which were predominantly outside the defendant’s control. Secondly, the debt and personal guarantee were obtained under a degree of duress, but primarily without the original lender ensuring independent legal advice was obtained by the second defendant (father).
Inordinate Delay Decision
When UB issued a Summary Summons it was put to the judge proceedings should follow the Fast Track procedure because the amount owed was clearly defined. Several months later a Motion for Judgment was filed, with the presiding judge adjourning proceedings so that affidavits could be exchanged. CAP later replaced UB as the claimant and there was a significant delay in the former receiving all necessary paperwork to continue the court claim.
From the point of UB first issuing proceedings to the December 2021 hearing, there were a series of adjournments and delays. These are sighted for a variety of reasons including non-attendance of a party to a scheduled hearing and hold-ups with procedural paperwork. Given the nature of legal documentation, it rarely moves quickly. There is an appreciation in judicial systems to favour accuracy over immediacy, but there are limits. The claims process is a relatively straightforward one despite the time absorbed in this case (including a second Summary Summons). Mr Justice Meenan deemed the flow of documentation and process of litigation to be unacceptably slow resulting in the defendant’s case being prejudiced. He also suggested that had the claimant been present for a hearing 5 years ago, the case would most likely be concluded then because the defendants were in attendance. Majority liability for the inordinate delay in the case reaching climax was attributed to the present and previous claimants.
Independent Advice Duress Decision
With the case against the defendant now reaching its climax, the Judge took a view on the original lender’s obligations to the second defendant – those of ensuring independent legal advice was obtained and implementing safeguards once informed of undue influence. There was a lack of evidence to indicate the original claimant had met this obligation. Given the time now lapsed, any evidence by way of verbal recollections 12 and 15 years ago would be difficult (if not impossible) to validate beyond reasonable doubt.
The judge deemed the balance of justice (i.e. that between the rights of the accused and the rights of the victim) favoured the defendants. The inordinate delay and lack of evidence to disprove the second defendant’s affidavit (regarding duress and safeguards) were sufficient for the €2.5 million claim to be dismissed. It would not be unexpected if subsequent adjudication rules the claimant liable for the defendants’ costs in this matter. Fees on both sides to date will no doubt be substantial.
Putting the Gavel Down
In Ireland, as in the United Kingdom, debt will be statute-barred after 6 years unless debt recovery action is still in progress. This is to ensure creditors and debtors have reasonable time and motivation to seek and receive payment. Debt recovery action taken by Advocate is subject to the same 6-year limit. We can and do see successful cases where the debt presented to us was in danger of being statute-barred. To maximise your chances of receiving payment, we recommend you take action sooner rather than later. We certainly don’t recommend taking 17 years to bring a case to its climax as has transpired with the €2.5 million write off. Cases at Advocate follow a 7, 14 or 21-day process with most debts recovered within a matter of days. As they say, time is money!