National Asset Loan Management Ltd v Cahillane; Re John Christopher Cahillane
| Jurisdiction | England & Wales |
| Judge | Kevin Prosser |
| Judgment Date | 20 January 2015 |
| Neutral Citation | [2015] EWHC 62 (Ch) |
| Court | Chancery Division |
| Date | 20 January 2015 |
[2015] EWHC 62 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Kevin Prosser QC
sitting as a Deputy Judge of the High Court
Jeremy Goldring QC and Susannah Markandya (instructed by Edwin Coe LLP) for the Appellant
Hilary Stonefrost (instructed by Portner & Jaskel LLP) for the Respondent
Hearing date: 11th December 2014
Kevin Prosser QC sitting as a Deputy Judge of the High Court: Introduction
This is an appeal by the petitioning creditor, National Asset Loan Management Limited ("NALM"), against the orders of Chief Registrar Baister dated 23rd June 2014, adjourning NALM's bankruptcy petition and making directions on an application dated 20th June 2014 by the debtor, Mr Cahillane, brought under s.375 of the Insolvency Act 1986 ("the Insolvency Act"), to rescind or vary the order of His Honour Judge Pelling QC dated 6th June 2014.
This is also an application dated 8th August 2014 by Mr Cahillane, to vary Chief Registrar Baister's directions, and for specific disclosure of documents.
Background facts
Between 1999 and 2009, Allied Irish Bank ("AIB") made loans to Mr Cahillane and to entities whose indebtedness he guaranteed, to fund the purchase of a number of residential properties and undeveloped land, all situated in Ireland, mostly outside Dublin (together "the Irish Properties"). The loans were secured on the Irish Properties ("the Security"). At those times, Mr Cahillane was resident in Ireland.
In 2010, AIB transferred the benefit of the loans including the Security to NALM, pursuant to the Irish National Asset Management Agency Act 2009. I understand that the transfers were made on the basis of valuations of the Irish Properties as at 30th November 2009.
On 8th December 2011, NALM appointed Mr Barry Donoghue as receiver of the Properties.
In 2012, Mr Cahillane ceased to be resident in Ireland, and became resident in the UK. Service of statutory demand
On 15th May 2013, NALM served on Mr Cahillane a statutory demand under s.268(1)(a) of the Insolvency Act. In accordance with rule 6.1(5) of the Insolvency Rules 1986 ("the 1nsolvency Rules"), the demand specified the full amount of the debt at Euros 54,578,776 million (£47,250,260), placed a value of Euros 6,086,334 (£5,269,097) on the Security, and claimed payment of the difference, of Euros 48,492,442 (£41,981,163). S.269 of the Insolvency Act provides that in these circumstances the secured and unsecured parts of the debt are to be treated as separate debts.
Application to set aside the statutory demand
On 4th June 2013, Mr Cahillane applied to set aside the statutory demand, relying only on rule 6.5(4)(c) of the Insolvency Rules, which provides that the court may grant such an application if "the court is satisfied that the value of the security equals or exceeds the full amount of the debt".
By a consent order dated 10th July 2013, each party was given permission to adduce expert evidence in the field of chartered surveying "to address the value" of the Irish Properties for the purposes of Mr Cahillane's application. He was to serve his report by 21st August 2013, subsequently extended to 11th September 2013.
Expert report
Mr Cahillane's expert was Mr Adams-Cairns of Savills. He was not instructed simply to provide a present valuation of the Irish Properties. This is because Mr Cahillane wished to argue that, because of the special status of NALM under Irish law, the relevant value of the Irish Properties was their potential future value. For this reason, he instructed Mr Adams-Cairns to address the following issues in his report:
"3.1.1 comment on the appropriate valuation methodology to be employed in the valuation of the Irish Properties and any special assumptions that might be employed.
3.1.2 having regard to 3.1.1, comment on the values attributed to each of the Irish Properties by [NALM] and Mr Cahillane respectively and the reasonableness of each in the circumstances. This may involve inspecting any of the properties which you consider it necessary or appropriate to.
3.1.3 comment on the impact of the following issues on your views given under 3.1.1 and 3.1.2:
(a) [NALM]'s long-term economic view valuation methodology;
(b) [NALM]'s status as a public body and its financial objectives (particularly, that it is not a commercial bank and the influence of its statutory objective in determining an appropriate valuation methodology and any special assumptions to be applied); and
(c) the current state of the Irish property market, particularly liquidity, and the prospects for growth over the next 7 years (until 2010 [sic]) that would support a long-term valuation methodology as adopted by [NALM].
3.1.4 having regard to the alleged shortfall (based on [NALM]'s valuations), please comment on [the] amount of and the probability of any loss that would likely be sustained if [NALM]'s policies are adhered to and the Irish Properties are held up to 2020 (ie 10 years from [NALM]'s formation)."
On 10th September 2013, Mr Adams-Cairns informed Mr Cahillane that he would require a further extension of time until 20th September 2013. Accordingly, Mr Cahillane applied for a second extension, and for relief from sanctions. A hearing was fixed for 7th November 2013.
In the meantime, Mr Adams-Cairns' expert report was served on 21st September 2013.
In producing his report, Mr Adams-Cairns did not inspect any of the Irish Properties. Nor did he place a present, or indeed any, valuation on them.
I set out what I believe to be the material parts of his report: Section B, paragraphs 8 to 11, is headed "Factual Matters".
At paragraph 8, Mr Adams-Cairns commented on the Irish property market generally.
At paragraph 8.3 he noted that house prices in Ireland doubled between 2000 and 2006, stabilised in 2007, and "burst" in 2008. In September 2013 average house prices in Ireland were about 50% of their 2007 peak.
At paragraph 8.4 he noted that the Irish Residential Property Price Index fell by 21% between November 2009 (the NALM valuation date) and June 2013.
At paragraph 8.5 he noted that the September 2013 level of average residential property prices was currently close to the level which they reached before 2000.
At paragraph 8.14 he said:
"If residential property values increase broadly in line with the economy at 1.5% over 2013 (which would seem broadly consistent with the Central Statistics Office data that prices in the Rest of Ireland (outside Dublin) rose by 0.7% over the first 6 months), maintain this rate in 2014 and then increase to only 1.75% in 2015 and 2% per annum thereafter until 2020 they will be some 15.4% higher at the end of 2020 than they are today."
At paragraph 10, he discussed "valuation methodology".
At paragraph 10.7 he said that it would be quite wrong to rely on a report provided by a selling agent in trying to assess market value.
At paragraph 10.12 he said that the most reliable valuation approach is the comparable approach; but at paragraph 10.13 he said that in the case of development sites there is frequently no suitable comparable evidence on which to rely, and valuers are obliged to resort to what is known as a residual method, which involves using comparable evidence to arrive at the likely end values for the completed development and then deducting the estimated costs of development (sale, construction, finance) and an allowance for profit with the remaining or residual amount representing the amount a developer can afford to pay for the site.
At paragraph 10.14 he identified a main difficulty with the residual approach, namely that the site value is highly sensitive to the assumptions made, in particular with regard to the build costs and the end selling price of the built units.
Then at paragraph 10.15 he referred to appendix 6 to his report which:
"illustrated with a simplistic residual valuation model how a small development of 10 houses might currently suggest a site value similar to agricultural land values. I have then shown that if house values increase by only 15% the site value might increase by a staggering 2000% (all other things being equal, including ignoring the fact that if values are rising sale rates may do so as well which would increase this differential even more)."
Indeed, Appendix 6 assumes that a development site has a current value of 8,000 similar to agricultural value, and suggests that its value could increase over a future period by 2000% to 170,000 if house prices were to increase by 15% over that period.
At paragraph 10.16 he said that this was an extreme example, but "it gives useful insight into the problems which have been experienced on development land values in Ireland when house prices first rose and had funds secured against them and then fell."
At paragraph 10.18 he identified a second main difficulty with the residual valuation approach, namely that "simply because a residual valuation suggests a particular value or worth for a sale it does not mean that there is a purchaser in the market place prepared (or able) to [pay] such a figure and as such it may not represent market value."
At paragraph 11 he said that papers supplied by Edwin Coe LLP giving details of the Irish Properties were incomplete. In particular, at paragraph 11.4 he said that as a result of the brief and incomplete nature of the papers he did not have a comprehensive overview of the Irish Properties.
Section C, paragraphs 12 to 14, is headed "My Opinion".
At paragraph 12.1 Mr Adams-Cairns said that "on balance it appears that values in Ireland have probably started to rise".
At paragraph 12.2 he said: "Whilst I have no statistical or research data to support a projection I note that a modest recovery in prices over...
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