16 April 2010

Mortgage: Totara Investments v. Crismac

Further fallout from the Digi-Tech tax scheme has left a financier high and dry. A financier could not use a power of attorney clause in mortgage documents to extend its security over other un-mortgaged assets after the initial security proved worthless.

Crismac Ltd fronted the litigation as representative of borrowers who had invested in a project promising substantial tax savings. Tax benefits evaporated after the scheme was successfully challenged by Inland Revenue as tax avoidance.

Totara Investments funded investors like Crismac into the Digi-Tech scheme. Crismac was given a limited recourse loan, with Totara’s rights of recovery limited to prescribed Digi-Tech scheme assets. When these assets proved worthless, Totara used a power of attorney clause in the loan documents to create a mortgage over other Crismac assets and then proceeded to appoint a receiver to realise these assets.

The Supreme Court ruled this was invalid. The primary clause in the loan documents made it clear that it was a limited recourse loan with a right of recourse over specified assets only. A secondary clause creating a power of attorney in favour of Totara could not be used to seize further assets.

Totara Investments v. Crismac Ltd – Supreme Court (16.04.10)

06.10.002