Whitehead v Household Mortgage Corpn plc

A secured creditor does not, merely by valuing its security for an individual voluntary arrangement and accepting a dividend on an estimated unsecured shortfall, abandon security for that part of the debt. In the absence of an express term or specific agreement, the valuation and participation are provisional. The creditor may apply the proceeds of a later realisation towards the whole unpaid secured debt, subject only to credit for the dividend actually received.

An approved voluntary arrangement is construed as a consensual agreement. Terms preserving secured creditors’ enforcement rights, and treating only an actual shortfall on realisation as unsecured, strongly exclude an implied surrender of security.

The appellants had granted HMC a first legal mortgage over their home. Mr Whitehead later entered an individual voluntary arrangement. HMC valued its security at £65,000, claimed £37,109.05 as an unsecured shortfall and received a dividend of £1,874.

When a subsequent mortgagee sold the property for £137,000, HMC required redemption of the full mortgage debt, crediting only the dividend received. The Whiteheads sought an account on the basis that HMC had released security for the claimed shortfall.

A District Judge held that the point was an abuse of process because it could have been raised in earlier possession proceedings. His Honour Judge Yelton dismissed the ensuing appeal, also holding that any release did not bind Mrs Whitehead. The central issue was whether HMC’s participation in the arrangement amounted to an election to abandon part of its mortgage security.

1. Appeal dismissed unanimously. Chadwick LJ, with whom Sedley and Scott Baker LJJ agreed, held that HMC was entitled to require redemption for the full unpaid mortgage debt, less the dividend actually received.

2. Under section 260 of the Insolvency Act 1986, an approved voluntary arrangement is construed as a consensual agreement between the debtor and the bound creditors. That construction did not, however, convert HMC’s claim for an estimated shortfall into an abandonment of its legal charge.

3. The arrangement expressly preserved every secured creditor’s right to enforce its security. It also treated a shortfall to secured creditors as an unsecured liability. Read in context, that meant an actual shortfall after realisation, not a shortfall produced by a provisional valuation for voting and dividend purposes. There was no express term, or agreement with HMC, surrendering security above £65,000.

4. The court drew assistance, by analogy only, from the bankruptcy provisions in the Insolvency Rules 1986. They permit a secured creditor to prove for an estimated unsecured balance while retaining the proceeds of realisation for the secured debt, subject to adjustment for any dividend overpayment. The court was slow to imply a materially different result in an arrangement proposed as an alternative to bankruptcy.

5. Khan v Permayer [2001] BPIR 95 was distinguishable. Its arrangement showed that the creditor had agreed to be treated as unsecured for the whole debt and had therefore abandoned security. This arrangement showed the opposite.

6. The court’s observations on abuse of process were not necessary to the result. Applying Johnson v Gore Wood [2002] 2 AC 1, the fact that a point could have been raised earlier does not itself make later reliance abusive. The earlier hearing concerned suspension of a possession warrant and immediate interest arrears under the Administration of Justice Act 1970, not an investigation of the principal mortgage debt. Had the substantive point succeeded, the court would not have rejected it as abusive.

• Court of Appeal (Civil Division) Dismissed the Whiteheads’ further appeal. HMC’s acceptance of the IVA dividend did not release any part of its mortgage security.

• Southend County Court (His Honour Judge Yelton) On 11 March 2002 dismissed the Whiteheads’ appeal. He held that any effect of the dividend did not release Mrs Whitehead and that the point was abusive to raise.

• Southend County Court (District Judge) On 14 January 2002 held that reliance on the IVA dividend was an abuse of process because the issue could have been raised in earlier possession proceedings.