General Mediterranean Holding SA SPF v Qucomhaps Holdings Ltd & Ors

A creditor holding security for a guaranteed debt has an equitable obligation to take steps necessary to perfect it. That obligation may include modest continuing steps needed to keep the security effective. It is not an absolute duty to preserve value or ensure that a surety can recover from the security. The creditor need not incur sizeable expenditure or significant risk, and ordinarily owes no equivalent preservation duty to the principal debtor concerning third-party security. A defence based on non-preservation must identify the required steps and explain how they would have protected the security. On summary judgment, the court may scrutinise unsupported or contradicted assertions without conducting a mini-trial.

General Mediterranean Holding SA SPF lent money to QucomHaps Holdings Limited, secured by charges over assets of its subsidiary and guarantees from William Harkin. The appellants alleged that the creditor failed to take steps under Czech law to preserve the security during the subsidiary’s administration, thereby discharging their liabilities.

Master Yoxall struck out the defence and counterclaim and entered summary judgment. Sir David Eady dismissed the appellants’ appeal in [2017] EWHC 1409 (QB). The Court of Appeal considered the scope of the creditor’s equitable obligations and whether the appellants had a real prospect of defending the claims.

1. Appeal dismissed. The appellants had no real prospect of defending the claims on the basis of breach of equitable obligations relating to the security.
2. Scope of the equitable obligation. The creditor’s duty to perfect security may require modest continuing steps where they are necessary to keep the security effective. It is not an absolute duty to ensure that a surety can resort to the security. The creditor need not incur sizeable expenditure or run significant risk. The authorities, including Wulff v Jay, China & South Sea Bank v Tan and Yorkshire Bank plc v Hall, supported a distinction between perfecting security and exercising powers to sell, take possession or intervene in a company’s affairs. Silven Properties Ltd v Royal Bank of Scotland plc was consistent with the creditor having no general duty to realise or preserve the value of security, but did not eliminate the limited duty to keep security perfected. The court also doubted that such a duty would ordinarily be owed to the principal debtor in relation to security granted by a third party.
3. Summary judgment test. Under Part 24, the question was whether the defence had a real prospect of success, rather than whether success was probable. The court was not to conduct a mini-trial, but was not required to accept unanalysed evidence. It could reject assertions lacking substance, particularly where contradicted by contemporary documents. The defence had to carry some degree of conviction: Three Rivers DC v Bank of England (No 3), Swain v Hillman, ED&F Man Liquid Products Ltd v Patel and Calland v Financial Conduct Authority.
4. Application. The defence did not identify the steps GMH should have taken by 30 March 2010, explain why they were required, or show how they would have preserved the security. The evidence did not establish that GMH had been obliged to buy the subsidiary, pay its creditors or fund such payments. Nor was GMH required to expose itself to the risk of a compensation order by filing a claim based on a charge it reasonably believed might be ineffective. The appellants produced no evidence from a person with relevant personal knowledge, and Mr Harkin’s own contemporaneous position indicated that the creditors had to be paid. The claim against QucomHaps was still less arguable because the subsidiary would have had an indemnity if its assets had been used to pay GMH.

• Court of Appeal (Civil Division). Appeal dismissed. Lord Justice Newey gave the leading judgment, with Lord Justice Lewison and Mr Justice Henry Carr agreeing.
• High Court, Queen’s Bench Division. Sir David Eady dismissed the appeal from Master Yoxall’s decision in [2017] EWHC 1409 (QB).
• Master Yoxall. The defence and counterclaim were struck out and summary judgment was entered for GMH.