Pursuers: O'Brien; Maclay Murray & Spens LLP

Defenders: Connal QC; McGrigor Donald LLP

30 March 2012

[1] The pursuers are trustees of the 2004/2005 Eurocentral Hotel Syndicate which was established to invest in the development of a hotel and office complex at Eurocentral, Holytown, Motherwell. The Syndicate are the owners of a site on which a hotel, which is operated as The Dakota, and adjoining offices, which are unoccupied, have been erected.

[2] The Syndicate funded the initial consideration for the land by cash, which its members provided, and by a £13.5 million loan from Anglo Irish Bank Corporation plc ("AIB"). By assignation dated 23 March 2011 AIB assigned loans and securities, including its rights in the loan agreement with the Syndicate and a standard security which covered the Syndicate's borrowings, to Hadrian S.A.R.L. ("Hadrian"). When the Syndicate failed to pay certain sums which were due under the loan agreement, Hadrian on 23 August 2011 served notice on the Syndicate that an event of default had occurred under clause 10 of the loan agreement and demanded payment of the outstanding portion of the loan. On the same day Hadrian served a calling-up notice on the Syndicate.

[3] In about January 2012 Hadrian began to market the subjects. On 12 March 2012 the Syndicate became aware that Hadrian had accepted in principle an offer for the subjects. On further enquiry it transpired (a) that on 2 March 2012 Hadrian had received an offer from the hotel operators to purchase the hotel for £5.0 million and (b) that on 9 March 2012 it had accepted in principle an offer of £5.2 million for the hotel from Calgacus Capital Limited ("Calgacus") which is its wholly owned subsidiary. The Syndicate asserted that the effect of the proposed deal would be (i) that its members would incur a substantial tax charge of approximately £2.3 million in the form of a balancing adjustment in respect of capital allowances which it had obtained if the subjects or part of them were sold outright before 6 April 2012 (Capital Allowances Act 2000 sections 328 and 330 and Finance Act 2008, Sch 27 para 31) and (ii) that the Syndicate would be left owning the unoccupied office premises and would incur costs as a result.

[4] The Syndicate seeks interim interdict against Hadrian from disposing of the subjects or entering into a contract to dispose of the subjects without first having carried out a fresh process of advertising and marketing the subjects which complies with section 25 of the Conveyancing and Feudal Reform (Scotland) Act 1970 ("the 1970 Act").

[5] Section 25 of the 1970 Act provides:

"A creditor in a standard security having the right to sell the security subjects may...exercise that right either by private bargain or by exposure to sale, and in either event it shall be the duty of the creditor to advertise the sale and take all reasonable steps to secure that the price at which all or any of the subjects are sold is the best that can be reasonably obtained."

[6] The Syndicate averred that Hadrian had failed to perform its statutory duty under section 25. Hadrian engaged Jones Lang Lasalle ("JLL") to market the subjects but the Syndicate averred that both Hadrian and JLL failed to market the subjects properly before arranging for a sale to Hadrian's associated company. It is not necessary to set out their allegations in detail. They include the following assertions:

(i) that the subjects were not marketed by many of the usual methods including Property Week, Estates Gazette Online and press advertisements;

(ii) that unlike properties nearby which also fronted the A8/M8 motorway no "For Sale" banner was displayed ;

(iii) that JLL did not make the details of the property available on its website;

(iv) that the period of open marketing from 23 January 2012 to a closing date of 2 March 2012 (extended to 9 March) was unusually short in the present property market;

(v) that inaccurate information was included in the sales particulars which also omitted relevant information including a guide price which is normally stated and the fact that the A8/M8 was to be upgraded;

(vi) that JLL failed to follow up expressions of interest, in particular from SG Commercial, and did not seek to obtain management accounts for the hotel when a party interested in making an offer for the hotel requested them; and

(vii) that JLL had not negotiated with the present hotel operators, who were interested in acquiring the offices along with the hotel, or approached other hotel operators to see if a sale or lease of the hotel and offices in combination could be achieved.

[7] By adjustment intimated on the morning of yesterday's hearing the Syndicate extended its challenge to allege that Hadrian had used the section 25 procedure for an improper purpose, namely to apply commercial pressure on the Syndicate to pay more towards the outstanding debt than the loan agreement with AIB provided for. The loan to the Syndicate was a non-recourse loan which limited the lender's right to recover the loan to the assets of the Syndicate and prevented recourse against the personal assets of members of the Syndicate. The Syndicate alleged that the hotel operators had been willing to take a "lesser interest" in the hotel with a date of entry of 9 April 2012 and that that deal would not have triggered the tax clawback which the Syndicate feared. By rejecting that bid and engineering a bid from its wholly owned subsidiary, Calgacus, Hadrian was seeking to put commercial pressure on the Syndicate to pay it more money in order to avoid a deal being implemented by 6 April 2012, hereby exposing the Syndicate to the tax clawback.

[8] Mr Connal QC for Hadrian challenged some of the assertions and Mr O'Brien for the Syndicate withdrew some of the allegations in relation to the marketing of the subjects. In particular, it became clear from the affidavit of Mr Oliver Abram of JLL that there were advertisements of the sale of the subjects in the national press, that the hotel operators, which from the outset were interested in bidding for the subjects, had requested that there should be no "for sale" banners which might affect their business, that JLL marketed the subjects on its hotels website rather than its general website but that it had emailed the sales particulars to the 3,215 recipients on its general property marketing list and the 400 recipients on its specialist hotel marketing list, and that JLL had repeatedly requested the hotel operators to release its management accounts without success. Mr Abram also recorded a different professional judgement about the suitability of Estates Gazette Online and Property Week for advertising investment opportunities. He explained that the closing date was fixed in the hope that the hotel operators would be a special purchaser and would offer for both the hotel and the adjacent offices.

[9] Mr Abram disagreed with criticisms about the desirability or necessity of disclosing to sophisticated purchasers possible future rates liability, the site area, and the proposed upgrading of the A8/M8. He had no record of any request for an indicative price from SG Commercial and explained that, in view of the size of the marketing exercise, JLL would follow up only more definite expressions of interest. He stated that, while the hotel operators had earlier shown an interest in expanding into the adjacent vacant offices and were an obvious candidate to purchase the subjects, they eventually were prepared to offer only for the hotel. Seven parties had noted an interest after circulation of the sales particulars but only the hotel operators submitted a bid on the initial closing date of 2 March 2012. Hadrian had instructed JLL to go back to all interested parties to give them an opportunity to submit bids for the hotel and the offices together or separately. On 9 March 2012 the hotel operators had renewed their bid for the hotel and Calgacus had made the higher bid. He expressed the view that sufficient steps had been taken to obtain the best market price for the subjects in difficult economic circumstances.

[10] Mr O'Brien for the Syndicate submitted that there was a strong prima facie case and that the balance of convenience favoured the grant of the interdict because the Syndicate would either have to pay up to £2 million to Hadrian to buy off the risk of the tax clawback or incur that tax liability. Also the Syndicate would be left with the unoccupied offices and would be likely to incur liability for rates on those premises. By contrast Hadrian would suffer no significant loss if the sale to its subsidiary were postponed. The hotel operators' offer of £5 million had been constant whether they purchased the hotel outright or temporarily took a lesser interest. While Hadrian was concerned to avoid the burden of clause 6.1.2 of the loan agreement which after 6 April 2012 obliged it to use all reasonable endeavours to avoid exposing the Syndicate to a tax clawback, that obligation was subject to an indemnity from the borrowers and a proviso that it did not materially prejudice the value of the security. Hadrian's decision to sell to a wholly-owned subsidiary suggested that it was not concerned urgently to realise funds from the sale of the security subjects but that its motivation lay elsewhere.

[11] Mr Connal submitted that the Syndicate had at best a very weak prima facie case and that the balance of convenience pointed towards the refusal of the interim order. He founded principally on the assertion that Hadrian had carried out its duties under section 25 of the 1970 Act and had arranged for a higher bid from Calgacus only after having received the bid from the hotel operators. The Syndicate's real concern was its members' exposure to the tax liability. The promoters of the development had warned prospective investors in the Syndicate at the outset of the possible need to service the loan if there were a shortfall in income in order to avoid a default in the first seven years which might trigger a clawback of tax relief.. He submitted that it was the default rather than the speed of the sale which threatened that clawback. The lenders were entitled to realise their security in face of a default and should not be required to face the uncertainty of an attempt to sell a lesser interest after 6 April 2012.

Discussion

[12] I have to consider first whether the Syndicate has set out a prima facie case and then I have to assess the balance of convenience.

[13] I am not persuaded that the Syndicate has made out a strong prima facie case of a breach of section 25 of the 1970 Act. It is clear from the documents that Hadrian had been preparing to market the subjects by early December and that the hotel operators had expressed a strong interest in acquiring the hotel. By then they were known to be a possible special purchaser. I attach considerable weight to the valuation of the subjects which CB Richard Ellis Limited ("CBRE") prepared for the Syndicate in August 2011. It suggested that the market value of the office alone was £1.48 million, that the market value of the hotel was £5.22 million if subject to the lease to the hotel operator or with vacant possession £5.91 million. There was no evidence to suggest that the hotel operators, which had a long-term lease, were interested in surrendering their rights under that lease. The office premises had never been occupied and it was not disputed that there were other high quality office premises in the vicinity which also had not attracted purchasers or tenants. At first sight therefore the offer of £5 million from the hotel operators and the slightly higher subsequent offer from Calgacus appear close to CBRE's estimate of the market level.

[14] I am not persuaded that the different views on the appropriate methods of marketing which Mr Douglas Smith of CBRE expressed in a letter dated 29 March 2012 are more than a matter of differing professional judgement, particularly as they were more concerned with the details of the presentation of the opportunity than the fundamental approach to the market. The differences between Mr Abram and Mr Smith do not point strongly to any failure by Hadrian, through its advisers JLL, to take all reasonable steps to secure the best price. In particular, in relation to the fixing of the closing date, I attach weight to the consideration that surveyors acting for the security holder were aware of, and anxious not to lose the chance of securing the sale of the whole site to, the hotel operators as a special purchaser.

[15] I accept Mr O'Brien's submission that as a general rule the court will wish to scrutinise closely the circumstances of a sale by a security holder to a connected person and not assume that the sale reflects a true market value: Davidson v Scott 1915 SC 924, Lord Salvesen at p. 935, Lord Guthrie at p. 936; Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, at pp.1359F-1360A. But in this case we have both the CBRE valuation of August 2011 and the £5 million bid by the hotel operators as a check.

[16] I turn to the Syndicate's other case, namely that the section 25 powers had been used for an improper purpose. It is important to observe that in the autumn of 2011 Hadrian had requested that the Syndicate pay a further £2 million in order to renegotiate the loan agreement and avoid the tax clawback. Mr Gary Taylor, one of the trustees of the Syndicate, provided a statement giving an account of those negotiations. Eventually, the members of the Syndicate in a ballot in December 2011 voted not to pay a further £1.2 million into the Syndicate to enable that deal to proceed. It was only after that decision that Hadrian proceeded with the marketing of the subjects.

[17] In support of a contention that a security holder had a duty to exercise his powers of sale with proper regard to the interest of the debtor Mr O'Brien referred to Lord Jauncey's statement in Armstrong v G Dunlop & Son's Judicial Factor 1987 SC 279 (at p. 283) that a creditor must exercise his rights civiliter. Lord Jauncey stated:

"A heritable creditor cannot use his powers for the primary purpose of advancing his own interests at the expense of the debtor when he has an alternative of proceeding in a more equitable manner."

But it is clear from Lord President Hope's opinion in Halifax Building Society v Gupta 1994 SC 13 (at pp. 22-24) that Lord Jauncey's observations must be read in their context in which the likelihood that the security subjects would realise more than the secured debt meant that the creditor had to take account of the debtor's interest in the surplus. In this case, by contrast, there was no question of the security subjects realising enough to pay off the secured debt and, as I have said, the lender had no recourse against the private assets of the members of the Syndicate.

[18] Mr Connal did not produce the offer which the hotel operators had made but informed me that it was for an outright purchase of the hotel rather than an acquisition of a lesser interest. I was not informed why the hotel operators had departed from their earlier suggestion that they were willing to pay the same sum for the lesser interest. There was no suggestion that Hadrian had engineered any such change of mind. If there had been such an intervention in order to enhance its negotiating position, I would have had to consider whether the security holder was misusing its power of sale. But on the basis that the hotel operator's offer was a bona fide arm's length offer, which Hadrian could have accepted, I do not consider that it was a misuse of the power of sale for Hadrian to make a higher offer through its subsidiary in order to gain leverage over the borrowers. Therefore, on the information placed before me at this interim stage, I consider that the Syndicate's case that there has been an improper exercise of the power of sale is very weak.

[19] Before I turn to the balance of convenience I record that Mr Connal referred me to two decisions by Sheriffs Principal in support of the view that it might be incompetent for the court to grant an interdict against a security holder from exercising his power of sale: Associated Displays Ltd v Turnbeam Ltd 1988 SCLR 220 and Gordaviran Ltd v Clydesdale Bank plc 1994 SCLR 248. In my view the only question of incompetence in those cases was the wording of the interdicts sought. For good reasons the court may be slow to grant an interim interdict against a creditor from realising the security subjects without clear evidence of a breach of section 25 of the 1970 Act or some other legal wrong and may prefer to leave the debtor to claim damages. But that is not an issue of competency.

[20] One of the important factors in assessing balance of convenience, as is well known, is the relative strength of the parties' positions. For a recent discussion of this see Lord Drummond Young's opinion in Kipling v Dunbar Bank plc [2012] CSOH 40 at paras [12] to [14]. On the information placed before me, I consider the Syndicate's case for both of its challenges to be weak. I also consider that if on further investigation a more cogent case can be made which eventually succeeds, it is likely that the Syndicate will have an adequate remedy in damages. I recognise that the commercial reality may be that a compromise may be unavoidable and Mr O'Brien informed me that the Syndicate had already made a substantial offer in an attempt to resolve the dispute. But I can attach little weight to that consideration as the court cannot speculate on how parties may respond to its decision.

[21] I accept that the Syndicate may suffer a greater financial loss if I decline to grant an interim interdict than Hadrian may suffer by having to remarket the subjects under the constraints of clause 6.1.2 of the loan agreement if I do. But the Syndicate's loss arises principally because its members were not prepared to contribute further funds to avoid a default or to buy a variation of the loan agreement at a time when they were potentially exposed to the tax clawback. I accept that, as a general rule, a secured creditor is entitled to sell the security subjects at the time of his choosing: Dick v Clydesdale Bank plc 1991 SC 365, Lord President Hope at p. 371. In the absence of a clear prima facie case of a legal wrong, I consider that it would not be appropriate to constrain Hadrian from completing the proposed sale. I take this view although I consider that it is likely that its introduction of Calgacus as the purchaser was motivated by a desire to gain a negotiating advantage over the members of the Syndicate.

Conclusion

[22] I therefore refuse the Syndicate's motion for interim interdict.

Postscript

[23] Mr Connal also raised a question of the title and interest of the trustees of the Syndicate and expressed concern whether they could meet a claim for damages for wrongful interdict if they obtained an interim order but ultimately were unsuccessful. Time did not permit a full argument on these points but that has not mattered as I have refused the motion. This morning the pursuers have lodged a Minute of Amendment introducing the members of the Syndicate as pursuers in the action. I have allowed the Summons to be so amended.