The Co-Operative Bank Plc v Phillips

A mortgagee’s powers, including the right to take possession, must be exercised in good faith for the purpose of obtaining repayment of the secured debt or protecting the security. A purpose of putting pressure on the chargor or persons in possession to procure payment towards the secured debt may satisfy that requirement, even where the debt is owed by a third party. Such proceedings are not for a collateral purpose or an abuse of process merely because possession may be harsh or may not produce an immediate sale or rental benefit.

Contractual costs provisions covering enforcement costs do not permit recovery of costs unreasonably incurred or unreasonable in amount. The burden of proving unreasonableness lies on the mortgagor. A liability for costs arising after an individual voluntary arrangement cannot be set off under its mutual-credit provisions.

The Bank held second legal charges over two residential properties owned by Mr Phillips. The first charges, held by Barclays, exceeded the properties’ values. The Bank issued possession proceedings, later failed to comply with disclosure and evidence directions, and discontinued the claims.

The issues were whether the Bank should pay costs on the indemnity basis; whether its own costs and its liability for Mr Phillips’ costs were recoverable under the charges; and whether those costs could be set off against Mr Phillips’ liabilities under his individual voluntary arrangement.

1. Disposition and costs basis. The possession proceedings were not brought for a collateral purpose outside the Bank’s powers and were not an abuse of process. The ordinary consequence of discontinuance therefore applied: Mr Phillips was entitled to his costs on the standard basis.
2. Mortgagee’s purpose. The equitable constraint on a mortgagee’s powers applies to the right to possession as well as to powers of sale or appointment of a receiver. The relevant purpose is obtaining repayment or protecting the security. The Bank had not proved that it intended to sell or let the properties, but the judge inferred that it brought the proceedings to put pressure on Mr Phillips in the hope of obtaining payment towards the sums secured by the charges. That remained a permissible enforcement purpose, even though the secured debt was owed by the company rather than by Mr Phillips personally.
3. Abuse of process. Proceedings for possession brought for that permissible enforcement purpose were not collateral proceedings. The fact that an order might be harsh, or that a second mortgagee might obtain no immediate net sale proceeds, did not justify refusing possession where the Bank could contend that the pressure might produce payment.
4. Costs under the charges. Clause 9 was construed consistently with Gomba Holdings Ltd v Minories Finance. Costs were recoverable only if reasonably incurred and reasonable in amount, with the burden on Mr Phillips and doubts resolved in the Bank’s favour. Although the proceedings were permissible, the Bank’s own costs and its liability for Mr Phillips’ costs were not reasonably incurred because the proceedings produced no benefit and were abandoned. Neither was recoverable under clause 9.
5. Set-off. There was no common-law or equitable set-off. The contractual IVA provisions did not apply because the Bank’s liability for costs arose after the IVA commenced and was not a pre-existing debt or dealing.

Consequential matters, including assessment of costs, any payment on account and directions concerning the Part 20 claim, were adjourned.

The Bank commenced two possession claims in the Weston-super-Mare County Court and later discontinued them.

• County court: A Deputy District Judge refused to strike out the claims as an abuse of process and permitted an amended defence.
• Appeal: His Honour Judge Cotter QC held that it was unnecessary for Mr Phillips to plead abuse of process before applying to strike out, ordered disclosure, and transferred the proceedings to the High Court.
• High Court (Chancery Division): The claims having been discontinued, the court determined the consequential issues and refused indemnity costs.