Byrne -v- Killoran & anor [2014] IEHC 328 (27 June 2014)

Judgment Title: Byrne -v- Killoran & anor

Neutral Citation: [2014] IEHC 328

High Court Record Number: 2013 273 SP

Date of Delivery: 27/06/2014

Court: High Court

Composition of Court:

Judgment by: Ryan J.

Status of Judgment: Approved

Neutral Citation: [2014] IEHC 328

THE HIGH COURT

[2013 No. 273 SP]

BETWEEN

DEREK BYRNE

PLAINTIFF / APPLICANT

AND

DESMOND KILLORAN AND TOM O’BRIEN

DEFENDANTS / RESPONDENTS

Judgment (No. 2) of Mr Justice Ryan delivered on the 27th June, 2014.

1. I gave judgment originally in this case on the 14th January, 2014, but subsequent to the hearing it became apparent that the application had been presented and argued on a factual basis that was mistaken and materially different from the reality because important events had been overlooked. The parties then returned with affidavit evidence and re-argued the case on the corrected facts. In the result the case as now appearing is substantially different, which creates procedural complications that, in my view, make it impossible to dispense the various orders that are required to supply the relief claimed or even to refuse them definitively.

2. The background to this application appears from the introductory paragraphs of my earlier judgment, as follows:

“The applicant is the lessee of a large guesthouse at Upper Leeson Street, Dublin. The lessor is the first respondent, Mr Killoran, who, with his wife, mortgaged the property which is comprised in three titles to Allied Irish Finance Ltd. The second respondent, Mr O’Brien, is the receiver appointed by the Bank on the 12th December, 2012, under powers contained in the mortgages because of default in repayments. The demised premises comprises three lots with separate titles, each of which is held by the Bank as mortgagee to secure large advances made to Mr Killoran.

…….

Mr Killoran does not accept that the receiver is entitled to have the rent paid to him so Mr Byrne is faced with two claimants and has brought this summons by way of interpleader. Meanwhile, since the 1st January, 2013, he has been paying the rent into an escrow account.”

3. Mr Killoran raised two issues to deny the receiver’s entitlement to the rent being paid by Mr Byrne, one of which was that there was a defect in the title of one of his mortgaged properties such that the Bank did not acquire and did not hold his interest. I accepted the submissions made on behalf of the receiver on the validity of the Bank’s security. I proposed therefore to direct the applicant to pay the rent under his lease to the receiver, the second respondent, and to order the transfer of the funds in the escrow account into that party’s name.

4. Mr Killoran also argued that while two of the titles of his property were not affected by this issue, it was impossible to delineate the precise boundaries or to apportion the rent because of interconnections and overlapping of the properties. It was unnecessary to rule on this point because of my decisions on the other questions but it could arise for consideration once again.

5. On the resumed hearing, the changed circumstances were first, that the original lender, Allied Irish Bank Finance Limited, (“AIF”) had transferred its assets and liabilities to its parent, Allied Irish Bank Plc, (“AIB”) by a transaction that was effected on the 1st January, 2007. Pursuant to a transfer of business banking agreement of the 28th August, 2006, as approved by the Central Bank Act 1971 (Approval of Scheme of Allied Irish Finance Ltd and Allied Irish Banks, plc) Order 2006 (S.I. No. 557 of 2006), the business of Allied Irish Bank Finance Limited was transferred to Allied Irish Banks plc with effect from the 1st January, 2007.

6. Secondly, one of the mortgage deeds executed by Mr Killoran conveyed the property to AIF but was executed in 22nd April, 2009, after the transfer of assets.

7. Thirdly, independent of the appointment by AIF of Mr O’Brien as receiver over the three mortgages comprising Mr Byrne’s leasehold take, which was central to the interpleader application, AIB had on the 30th May, 2013, served notice to enter as mortgagee in possession, all of the mortgage properties of Mr Killoran and had appointed Mr O’Brien as agent. It is noteworthy that the Special Summons in the interpleader application was issued on the 13th May, 2013.

8. These difficulties were wholly different from what had been argued at the original hearing of the interpleader.

9. Mr Killoran raised a series of new issues as follows:

• From the 1st January, 2007, AIF had no interest in, or claim arising from, any of the loans advanced to Mr Killoran or the security interests created to facilitate them.

• AIF had no power to appoint a receiver over the property.

• AIB did not give any, or any sufficient, notice before purporting to act as mortgagee in possession and appointing Mr O’Brien as its agent.

• Mr O’Brien’s legal status is akin to that of a trespasser.

• It is unlawful for Mr O’Brien to act as receiver and agent simultaneously because of the different nature of the roles.

10. Mr O’Brien argued that the power to take possession transferred to AIB and was in place when notice was given and he was appointed as agent. The security held by AIF transferred to AIB and includes the rents associated with the property held by the applicant, Mr Byrne. The rents payable are still charged to the mortgagee, which remains AIB.

11. As I see it, in order for AIB to succeed in its application for Mr Byrne’s rent to be paid to Mr O’Brien in his capacity as agent of the mortgagee in possession, the following steps have to be taken:

(a) Join AIB to the interpleader application.

(b) Rectify the mortgage deed to substitute AIB for AIF as mortgagee.

(d) Treat the appointment of Mr O’Brien as agent of the mortgagee in possession generally as applying to these three mortgages, notwithstanding his discrete and different status as receiver.

(e) Consider the interpleader as if it involved AIB instead of AIF.

Legal Submissions
12. Both parties approached their submissions by addressing the April, 2009 mortgage, which post-dated the 2007 transfer, separately from the 1995 and 2002 mortgages.

13. Mr Padraic Lyons, counsel for the first defendant, submitted that the second respondent, Mr O’Brien, outlined the basis of his claim in his affidavit of the 17th July, 2013:-

“I say and believe that the only substantive issue for determination on this application is whether the Bank was entitled to appoint a rent receiver over the premises the subject matter of these proceedings on foot of its express powers to do so in the Mortgages of 22 May 1995, 20 December 2002 and 22 April 2009. I say and believe that if the Court is satisfied that the Bank enjoyed this power and properly appointed your deponent, the interpleader proceedings should be determined in favour of your deponent.”

14. Counsel submitted that from the 1st January, 2007, Allied Irish Finance Ltd had no interest in, or claim arising from, any of the loans advanced to Mr Killoran or the security interests created to facilitate them. It follows therefore that AIF had no power to appoint Mr O’Brien as receiver over the property.

15. Counsel referred to the decision in The Merrow Limited v. Bank of Scotland Plc & Anor. [2013] IEHC 130, where Gilligan J. found that the failure to appoint a receiver under seal rendered the appointment void:-

“29. Since a receiver’s authority is derived from the instrument under which he is appointed, an appointment is not valid unless it is made in accordance with the terms of that instrument…..

……

44. It is clear from the foregoing that a receiver who is not appointed in accordance with the terms of the debenture is not validly appointed. In addition, an invalidly appointed receiver may be a trespasser on Company property.”

16. Referring to Mr O’Brien’s position that he is entitled to collect the rent on behalf of the Bank as agent of the mortgagee in possession, counsel submitted that the Bank’s authority to take possession of the mortgaged property is contained in clause 6(b) of the deeds of mortgage and requires that the mortgagee can enter into possession “on giving prior notice to the Borrower before entering into possession”.

17. Mr O’Brien was appointed as receiver on the 30th May, 2013, the same date upon which notices were furnished by the Bank to the first defendant that they were entering into possession of the property. The Bank therefore failed to satisfy the requirement of “prior notice” as specified in the mortgage deed. In the absence of sufficient prior notice, no person, whether qua agent or otherwise, can lawfully take possession of the property pursuant to clause 6(b). Therefore the second defendant’s actions constitute trespass and are entirely unlawful.

18. Counsel further submits that the second defendant cannot act simultaneously as receiver and agent for the bank qua mortgagee in possession because of the different nature of both roles, relying on Refuge Assurance Company v. Pearlberg [1938] Ch. 687, where Lord Greene M.R. stated:-

“The two positions appear to me to be too incompatible with one another to permit of any such suggestion. In the present case the incompatibility appears very clearly, because, if the argument were correct, it would mean that Mr Roberts is to be treated at one and the same time as the agent of the plaintiffs, to retain possession of the premises on their behalf, and as the receiver appointed by the plaintiffs as agent of the mortgagor, to collect the rent - two positions which are entirely inconsistent with the other.”

19. Mr Lyons also said that there are separate complications attaching to the April, 2009 mortgage. The terms of the mortgage state:-

“It has been agreed between the borrower and the mortgagee that all monies now owing or which shall hereinafter become owing from the Borrower to the Mortgagee whether as principal or security….shall be secured in the manner and terms provided.”

20. When the 2009 mortgage was granted, there were no outstanding liabilities by the first defendant to AIF because, at that point, those loans had been transferred to AIB in the transfer effected on the 1st January, 2007. Counsel argued that the premise on which the security is based is therefore flawed and the document ineffective. In those circumstances, Mr O’Brien’s appointment as agent is moot because the first defendant did not have any obligation to AIF and did not default in paying them - there was no cause for clause 6(c) to be invoked and Mr O’Brien has not been validly appointed.

21. As to the plaintiff’s claim that the references in the 2009 mortgage to Allied Irish Finance Ltd are no more than a misnomer and mistake on the face of the instrument, Mr Lyons submitted that the court must discharge its primary obligation in matters of contractual interpretation and give effect to the intention of the parties. Counsel referred to the decision of Laffoy J. in Point Village Developments v. Dunnes Stores [2012] IEHC 482, where she stated at para. 48:-

“….it is not for the Court, either by means of giving business or commercial efficacy or otherwise, to import into a contractual arrangement a meaning that might also be available from an understanding of the more general context in which the documents came to exist, but is one which is not deducible by use of the standard interpretive rules…”.

22. In Moorview v. First Active [2010] IEHC 275, at para. 3.6 Clarke J said that:-

“….a correction of the type with which I am concerned is not a separate branch of the law, but rather an application of the general principle that contractual documents should be construed according to their text but in their context. That context may make it clear that the words used in the text are a mistake. Thus, a reasonable and informed person may conclude that the words used are an obvious mistake and may also be able to conclude what words ought to have been used. In those circumstances, as a matter of construction, the court will, as it were, construe the contract as if it has been corrected for the obvious mistake.”

23. Mr Lyons argued that the intention of the parties in this case was clear - the first defendant borrowed money from AIF between 2002 and 2006. The 2009 mortgage was procured to give effect to the security required by the earlier borrowings. At all times this mortgage was created in favour of AIF and it was the only party the first defendant contracted with. The borrowings relate solely to AIF and Mr Killoran received no communication or correspondence from the Bank alluding to any transfer or referral of the agreement to AIB. The Bank relies on correspondence that passed between the parties’ solicitors in 2011, of which the first defendant was not a party, to support their position that notification of the referral of the loans to AIB plc was communicated to Mr Killoran.

24. Counsel said that the facts in this case are removed from Point Village and Moorview because Allied Irish Finance Ltd existed, unlike Moorview Properties in the latter case, and the intention of the first defendant was to contract with it as the bank he dealt with for all other transactions.

25. Counsel also submitted that the security over the property is defective as the second defendant cannot demonstrate that he has effective security over the entire building and premises and it is impossible to distil the total rent paid over the property into separate ratios reflecting the 1995, 2002 and 2009 mortgages. The Leeson Bridge Guest House is one business run from multiple properties and counsel relied on Gilligan J.’s decision at para. 79 of The Merrow Limited v. Bank of Scotland Plc & Anor. [2013] IEHC 130 in support of his argument:-

“I am satisfied that the property and assets of the applicants business are inextricably intertwined and run effectively as one business from the two premises. It is not possible to differentiate the subject matter of the two debentures from one another.…”

26. Mr Lyons argued that both Mr O’Brien and AIB could only have been aware of the defective nature of his appointment as receiver and that Mr O’Brien, seemingly, did not properly consider the basis of his appointment is a failure on his part. Mr O’Brien’s application must fail on the grounds that the deeds of his appointment of the 12th December, 2012 are void; he has failed to show that the 2009 mortgage can be interpreted as a security interest in favour of the Bank; the Bank failed to give prior notice in breach of clause 6(b); and, the dual roles of the second defendant as agent of the Bank and receiver is not one known in law.

27. Mr Denis McDonald S.C. and Mr David Whelan, counsel for the second defendant, in their submissions argued that at the time the deeds effecting Mr O’Brien’s appointment as receiver were executed, neither Allied Irish Finance Ltd nor Allied Irish Banks plc referred to S.I. No. 557 of 2006, which transferred the assets of the former to the latter. They argued that in circumstances where the assets of AIF were transferred to AIB, the power to appoint a receiver pursuant to clause 6(c) of the mortgage also transferred and was in place when the deeds of appointment were executed on the 12th December, 2012. The transferred security includes the rents associated with the property.

28. Counsel relied on Merrow Ltd (In Liquidation) v. Bank of Scotland Plc & Anor. [2014] IEHC 36, where the appointment of a receiver was challenged on a number of grounds, including the fact that the appointment was not made under seal. The Court accepted that the appointment was invalid but, on an application for a charging order over the plaintiff’s assets, this Court held that notwithstanding the invalidity of the receiver’s appointment, the assets over which he was appointed were still mortgaged to the Bank, and any invalidity of his appointment did not change the circumstances of the security arrangement.

“The plaintiff in the proceedings sought to free itself from its bank appointed receiver and succeeded in doing so. But what property was recovered or preserved? The answer is none; the alteration that took place temporarily was in the control of the company but all of its assets and liabilities remained unchanged. Its interest in [the assets]…. Did not alter; that company’s property was still mortgaged to the Bank, just as it was before the case.”

29. Counsel also submitted that the Bank complied with its obligations in giving notice to Mr and Mrs Killoran on the 30th May, 2013, that it intended to enter each of the secured properties in its capacity as mortgagee in possession. On the same date, the Bank entered into an agreement with the second defendant, naming him as its agent for the purposes of collecting the rental income from the secured properties. Mr O’Brien did not have power to take possession of the properties as receiver and, during that period, the rent was paid into the escrow account.

30. In reply to Mr Lyons’ submission that the appointment of Mr O’Brien as agent is invalid as it breaches clause 6(b) of the deed of mortgage, Mr McDonald argued that clause 6(b) states:-

“prior notice must be given to the borrower before entering into possession”.

31. He submitted that as far as the rents are concerned, it is quite clear that Mr O’Brien has not taken possession of the underlying properties because the rents are not in his possession. The letters of 30th May, 2013, were clearly given prior to Mr O’Brien’s entering into possession on behalf of the Bank and therefore there cannot be a breach of clause 6(b) of the mortgage in the circumstances because notice was given and entry into possession has not yet been effected.

32. Mr O’Brien is authorised, as agent of the Bank, to take possession and also has the right to collect the rental income from the secured properties where applicable. If he had been validly appointed as a receiver, he would also have had that right. The fact that he was invalidly appointed as receiver does not affect that conclusion that the rent, the same as the property, under clause 2(f) of the mortgage is owned at all times by the Bank. The evidence is that the form appointing Mr O’Brien as agent of the Bank was executed on 30th May, 2013. The agreement identifies Allied Irish Banks plc and Mr O’Brien, and refers to the transfer under the 1971 Act. At para. 1.1 the agreement outlines Mr O’Brien’s role and states he is appointed as agent for the purpose of:-

(a) Taking possession where possible on behalf of the Bank of the secured properties.

(b) Collecting the rental income from the secured properties where applicable.

33. Counsel argues that Moorview Developments Ltd v. First Active plc [2010] IEHC 35, supports the position that Mr O’Brien, as receiver or agent of the mortgagee in possession, does not obtain an interest in the assets over which he is appointed. Clarke J. stated at para. 4.3:-

“In those circumstances, it does not seem to me that the position of a receiver or agent is captured. A receiver does not own any interest in lands which are properly described as being owned by the company to which the receiver has been appointed. The lands remain owned by the company (in receivership). The fact that the receiver may well be entitled, provided that all necessary formalities are complied with, to execute a deed of transfer of a relevant interest in property in the name of the company does not alter that fact.”

34. In relation to the 2009 mortgage, the affidavit of Mr Bernard Carroll dated 12th March, 2014, outlines that the mortgage over 1 Upper Leeson Street refers to Allied Irish Finance Ltd as the mortgagee when it should have stated, following the 2007 transfer, Allied Irish Banks plc. The issue for the Court is whether this mistake in describing the mortgage affects the validity of the financial instrument, which both parties assumed to be valid until these proceedings.

35. The role of the 2009 mortgage is important - it stands as security for the loan facilities used by the first defendant between 2002 and 2006. Counsel submitted that the reference to Allied Irish Finance Ltd in the 2009 mortgage is a mistake and refer to authorities which they argue support the contention that a mistake of this sort can be corrected as a matter of construction.

36. In Nittan (UK) Limited v. Solent Steel Fabrications Limited [1981] 1 Lloyd’s Rep. 633, a mistake was made on an insurance policy and the name of a company was incorrectly inserted. Lord Denning M.R. held that such a mistake could be corrected by the court and stated at p. 637:-

“….it must have been plain to the parties and everybody that the words “Sargrove Electronic Controls Ltd” were used just as a name to describe the concern called Sargrove Automation…. In this court we are very used to dealing with misnomers. We do not allow people to take advantage of a misnomer when everyone knows what was intended…..”

37. Counsel argued that to allow the first defendant to take advantage of a misnomer in a security document, which was assumed by all parties to be valid until recently, would be to disregard the rules of construction. The 2009 mortgage must be read and construed in the manner the parties plainly intended. In Moorview, Clarke J. found it inconceivable that any other intention of the parties, other than the liabilities of the debtor were to be guaranteed by Moorview Developments, could be construed by a reading of the contract. At para. 3.6 he stated:-

“It is also clear from the speech of Lord Hoffman in

Investors Compensation

that a correction of the type with which I am concerned is not a separate branch of the law, but rather an application of the general principle that contractual documents should be construed according to their text but in their context. That context may make it clear that the words used in the text are a mistake. Thus, a reasonable and informed person may conclude that the words used are an obvious mistake and may also be able to conclude what words ought to have been used. In those circumstances, as a matter of construction, the court will, as it were, construe the contract as if it had been corrected for the obvious mistake.”

Discussion
38. Mr O’Brien and the Bank accept that his appointment as receiver was invalid because AIF did not have the power to appoint him. That is so because all relevant assets and powers had been transferred from AIF to AIB prior to the events in question.

39. AIB had mortgage powers by reason of the 2007 transfer to appoint a receiver for two properties out of three. In respect of the third, the 2009 mortgage deed conveyed that to AIF.

40. The Bank gave notice of entry on the 30th May, 2013, in respect of all the borrowers’ mortgaged properties and, on the same date, it appointed Mr O’Brien as its agent for that purpose. Since this date is subsequent to the issue of the interpleader summons, it is at least arguable that the general entry power that was invoked over the Killoran mortgages did not apply to Mr Byrne’s property.

41. Mr O’Brien did not act as agent in relation to the applicant’s leases but as AIF appointed receiver and the interpleader application was heard on that basis. Now that it transpires that this appointment was ineffective, the Bank - which was not a party to the proceedings - seeks to step in and take over the claim to the plaintiff’s rents on the basis of Mr O’Brien’s valid status as agent over the first defendant’s properties generally.

42. There is a certain practicality to the bank’s approach, although the Court has to be concerned about riding roughshod over procedural niceties. In addition to the other issues, the bank has to overcome the problem that the 2009 mortgage was executed by Mr Killoran in favour of AIF and not AIB, which was the properly entitled party. That came about by mistake because neither side adverted to the prior transfer of business to AIB but it was not that the wrong name was put into the deed by accident and was not noticed; the mortgagee named in the deed was the intended party but the wrong party because of the 2007 transaction.

43. AIB is presumptively entitled to get a new deed naming it as mortgagor but I think that formal rectification is necessary and it cannot be treated as simply a naming error and, although it may strike one as being a realistic approach to make a rectification order, I do not think I should do that in this interpleader.

44. The jurisdiction of the Court arises from the issues presented to it for decision. It is possible to do by consent what would otherwise be impermissible but there are limits to that facility. Sometimes the procedural framework is insufficient to support the weight of substantive decision sought to be imposed. In this case, I do not think it is possible to make all the orders that are required in the framework of the present procedure.

45. AIB may well be entitled to receive the rents of the Leeson Street properties because of the powers contained in the mortgages but before that can happen the 2009 deed has got to be rectified. Until then, AIB is not entitled to claim the rent for the property comprised in that last mortgage. Although the borrower agreed to execute a mortgage containing such power and can be compelled to do that if he refuses, that is a different thing from saying that the power already exists.

46. It seems to me that two possible legal situations may arise in the events that have happened. It may be argued in the first place that this is indeed a case for rectification of the mortgage deed so as to insert AIB instead of AIF. Alternatively, it could be proposed that the parties actually executed the mortgage deed that each of them intended to complete and that the relevant legal procedure is an application for specific performance of the original agreement with AIF, which in the present circumstances, having regard to the takeover of the assets of that entity, will have AIB as mortgagee.

47. On the renewed argument in this application, AIB argued that it was entitled to receive all the rents from the Leeson Street premises. But that is on a basis that is completely different from the case it had argued in the interpleader proceedings brought by Mr Byrne. I do not think that a limited application calling for an adjudication between two parties can be transformed into an entirely different claim at the stroke of a pen or because it is proposed to be a practical expedient if it involves a range of completely different issues and an approach that is wholly inconsistent with the case as previously considered. That is the situation that arises here. Although AIB appears to have a prima facie entitlement, first, to be put in the position of mortgagee in respect of the title covered by the 2009 mortgage, secondly to enforce its rights under the first two mortgages on the basis of the appointment of Mr O’Brien as agent, and thirdly, to serve notice of entry under the new mortgage and to appoint Mr O’Brien as agent thereunder, I cannot see any legitimate legal basis on which all those things can be effected or treated as having already happened in a legal proceeding that contains no reference to this new basis of claim or any of the necessary alterations required to produce the result that AIB seeks. Although it is proposed as a practical approach in the circumstances that have come to light, adapting the application to encompass all these steps requires too many legal and possibly factual questions to be decided in an unsatisfactory procedure.

48. This means that I am not going to determine the application on the basis proposed by AIB. It is necessary for AIB to bring an appropriate application to secure the various reliefs that are required to put it in the position of receiver of the rents paid by Mr Byrne.

49. As to the rent held in the escrow account, in the circumstances of the case, it would be unjust to order that the rent should be paid to Mr Killoran because he has not succeeded in his claim. If AIB is successful in its new applications, Mr O’Brien, as its agent, will become entitled to receive the rent paid by Mr Byrne. If AIB is not successful, the issue of entitlement to the rent will have to be decided. In the meantime, the status quo should be preserved in respect of the rent so that Mr Byrne continues to pay it into the escrow account.

50. I propose to adjourn this application until the determination of such further proceedings, or until further order may be made on the application of any of the parties.

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