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Hands off, its mine! Beneficial interests vs creditors’ rights

Litigation partner Alexander Wildschütz discusses one of his recent cases highlighting the impact of invisible third party rights on creditors’ interests.

Our client, a German bank, had obtained a judgment in the German courts against a former customer for the payment of €1.3m owed under various loan agreements. We quickly established that the debtor was the owner of a valuable property in Central London. The land register showed the debtor as the sole proprietor and, except for a mortgage, the register was free from any relevant third party interests.

Our application for an order for sale was met by a claim brought by the debtor’s wife that she had a beneficial interest of 50 per cent in the property and that it would therefore be unjust to permit the bank to proceed with the sale. The wife claimed that, although there was no mentioning of her in the land register, the debtor had transferred the half share in the property to her long before the bank took enforcement action.

Unlike most other jurisdictions, English law distinguishes between two classes of proprietary rights: the legal interest and the beneficial interest. The public information shown in the English land register is conclusive in respect of the legal interests such as ownership and securities. However, although beneficial rights can also be registered (and a bona fide beneficiary should always ensure prompt registration), the absence of registration is not necessarily irrebuttable evidence that no such right exists. A creditor’s right enforce against an asset might be restricted by private trust arrangements which remain invisible until invoked by the beneficiary.

We took a very firm position that the wife’s claim was nothing more than an attempt to frustrate the bank’s recovery of the judgment debt. It took very careful analysis and presentation of evidence including a lengthy cross-examination to secure our client’s position. The court concluded that if there was indeed a genuine trust arrangement in place giving the wife an interest in the property, it would have only been created very recently and with a view to minimise the bank’s prospects of recovery. The court held that in these circumstances the bank’s interest as a creditor prevails and permitted the sale to proceed.

For a full case report see Sparkasse Koln Bonn v Cutts, [2018] EWHC 1879 (Ch)

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