This decision of the Privy Council concerned the remedies available to a bank who lent money by a hypothec (a form of charge where the secured asset remains in possession of the debtor).
The Appellants obtained two loans from the Respondent. The larger of the two loans was to be secured by “a first registered hypothecary obligation” over two properties, one of which was owned by one of the Appellants’ parents (the “Black Mallet Property”).
Prior to drawdown, the Appellants and the Appellants’ parents entered a hypothecary obligation, which noted that the principal debtors were the Appellants and the Appellants’ parents were to be sureties. The obligation provided that the Appellants and the Appellants’ parents were to “pay the debts on demand and in the meantime by instalments…”
On completion, the Appellants started to pay the required instalments. However, a landslip made the Black Mallet Property uninhabitable and as a result greatly reduced its value. The Appellants ceased to pay their debts. After initially trying to recover under the Black Mallet Property insurance policy and unsuccessfully trying to persuade the Appellants to execute a promissory note for the debt, the Respondent commended proceedings against the Appellants for the sums due. The Appellants attempted to surrender both properties back to the Respondent, but this was rejected.
At trial, the Court found the Appellants liable to pay the sums claimed. The Appellants appealed to the Court of Appeal, where it was held the Respondent was entitled to recover the debt in a personal action, but gave leave to appeal to the Privy Council.
On appeal, the Appellants argued:
(1) As a matter of construction of the contracts, they had not taken personal liability in relation to the loans;
(2) The only remedy available to the Respondent was a hypothecary action under the Civil Code;
(3) The bank was not entitled to claim the full sums due, but only the arrears which had accrued at the date of commencement of proceedings; and
(4) The Court of Appeal had not given a fair hearing and had not given a reasoned judgment.
In relation to the personal liability argument, it was held the facility letter (which contained the conditional offer of the loans) should be read together with the personal obligations in the hypothecary obligation. It was held that the Respondent was not confined to enforcing its mortgage. The hypothecary obligation created both personal obligations and rights over the security, the former of which could be enforced by a personal action. The security was accessory to the loan and the bank had the option of enforcing the loan, but not seeking to realise its security. Additionally, because the Respondent did not pursue the hypothecary action, the Appellants did not have the right to surrender the properties.
The Privy Council held that, under the Civil code, the Respondent was entitled to pursue the full sums due as damages for breach of contract and confirmed there was no basis for criticising the Court of Appeal’s decision.
Although this is a decision of the Privy Council relating to the application of the Civil code in St Lucia, it confirms that in some circumstances lenders may not be limited to enforcing their security and, depending on the terms of the mortgage offer and deed of charge, may in fact commence personal actions against defaulting borrowers.
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