Close Brothers Ltd v AIS (Marine) 2 Ltd

A mortgagee selling a vessel must take reasonable care to obtain the best price reasonably obtainable at the time. The mortgagee’s choice of timing and method remains discretionary, subject to that duty. A sale is not actionable merely because the mortgagee acted unreasonably; the claimant must first establish an improperly low price and resulting loss. The usual burden lies on the mortgagor or guarantor, unless the purchaser is a connected person, in which case the burden reverses. The mortgagee’s duty is not discharged merely by appointing a reputable broker. A sale within a reasonable market bracket, particularly in a depressed market, will not ordinarily establish breach.

Close Brothers Limited lent money to AIS (Marine) 2 Limited to finance the purchase of a vessel. The vessel was mortgaged as security and later repossessed and sold after default. The Second Defendant had provided a personal guarantee and indemnity.

The First Defendant entered compulsory liquidation, so proceedings against it were stayed under section 130 of the Insolvency Act 1986. The claim against the Second Defendant continued. The principal issue was whether the vessel had been sold at an undervalue because the Claimant failed to take reasonable care to obtain the best price reasonably obtainable. The Court also considered the sale costs and the alleged connected-person relationship between the purchaser and the Claimant.

1. The Court entered judgment for the Claimant, with the sum to be assessed after further submissions concerning deductions from the sale proceeds.

2. The Court accepted the established principles governing a mortgagee’s sale of mortgaged property. A ship mortgagee owes the same duty as any other mortgagee. It must take reasonable care to obtain the best price reasonably obtainable at the time, while the timing and manner of sale remain matters for the mortgagee. The property must be fairly and properly exposed to the market, save in cases of real urgency.

3. The mortgagee is not in default unless plainly on the wrong side of the line. A true market value may involve an acceptable margin of error. The mortgagee must act as a reasonable person would act in realising their own property and must not unfairly prejudice the mortgagor. The same duty is owed to a guarantor. The duty is not delegable: the mortgagee remains responsible for failings by its broker.

4. Where a sale is to a connected person, the burden of proof may reverse. No evidence supported such a relationship here, and that allegation was abandoned. The burden therefore remained on the Second Defendant to show that the sale price was improperly low.

5. The critical question was whether the vessel had in fact been sold at an undervalue. Only if an undervaluation and resulting loss were established was it necessary to examine whether the Bank’s conduct caused that loss. The Court preferred Mr Mross’s valuation evidence and found that the sale price, although perhaps at the lower end, fell within the appropriate market bracket. The depressed market made a higher price unlikely. The Second Defendant’s evidence did not establish that the sale price was less, or materially less, than the open-market value.

6. The Court therefore did not need to decide the alleged reasons for the sale or the late construction argument concerning the indemnity. It nevertheless observed that appointing a reputable broker was not itself a breach, that the broker’s marketing efforts were adequate, and that a mortgagee may ordinarily sell promptly where the vessel is a wasting asset and continuing costs accrue.

7. The sale expenses required further particularisation and response. The Claimant was directed to provide a schedule, with any remaining dispute to be determined after further evidence and submissions.

First-instance decision. The judgment itself records that proceedings against the First Defendant had been stayed following compulsory liquidation, while the claim against the Second Defendant proceeded.