Debt Recovery Update: The Requirement to Supply a Demand!

Seeking to recover debt from the estate of a deceased debtor has long been a difficulty for creditors, especially lenders. If matters did not come to a head while the debtor was alive, then the certainty of the creditor successfully enforcing its position is reduced considerably after the debtor has died. Legal formalities must be observed before the creditor can be in a position to enforce its position. These relate to:

• whether the debtor made a will

• whether an executor was appointed

• whether the executor, or someone else in instances where the debtor has died without leaving a will, took out a grant of probate or administration, if there was no will

Small wonder then that some significant time could pass before any legal proceedings actually issue and the creditor may then have to deal with the fear of being statute-barred.

A recent judgment by Ms Justice Caroline Costello addressed these points, but despite the conclusions reached on the facts of that case, creditors would still be well-advised to sue a debtor’s estate, within two years of the debtor’s death.

Civil Liability Act 1961

In the recent case of Bank of Ireland v Matthews[1], the defendant Ms Matthews put forward the defence that the Bank’s proceedings were statute barred against her. Ms Matthews, in her capacity as executor, contended that the debt owed to Bank of Ireland had accrued prior to the date of the deceased’s death. She argued that on the basis that proceedings had not issued within two years of the date of the deceased’s death then the Bank’s claim against her was statute barred.

Check the fine print

In this case, Ms Justice Costello had already ruled that the Bank was entitled to sue Ms Matthews even though she had not yet taken out the grant of probate that she was entitled to take out. The judge went on to state that whether or not the debt had accrued at the date of death of the deceased depended on the “true construction of the deed of mortgage and charge”.

She analysed the Deed of Charge/Mortgage in some detail and found that, in essence, a letter of demand was a necessary pre-requisite to the sums owing by the deceased becoming due. On the basis of the wording of the Deed, even though the death of the debtor was stipulated as an event of default, the monies lent did not become payable on the occurrence of an event of default.

Saved by the demand letter

Rather, the Deed provided that upon the occurrence of this event, the Bank may make a demand for payment of any remaining unpaid monies and that it was on the making of that demand that the monies became due and payable to the Bank. Accordingly, even though Bank of Ireland had not made demand during the deceased’s lifetime and in fact, only demanded the sums secured by its mortgage some three and a half years after his death, the Court held that the Bank’s claim against the deceased’s estate was not statute-barred based upon the necessity to make a demand for payment of the debt.

All sums became due on execution?

The judge distinguished the provisions of the Deed of Mortgage/Charge that provided that monies lent become due, for the purposes of the Conveyancing Acts, as soon as it is executed. She ruled that these terms have long been included in mortgages for the purposes of protecting third parties dealing with lenders. She noted that to construe this as meaning that the secured sums became due on execution, would:

• fly in the face of the purpose of the entire loan and repayment transaction

• render the provisions making a demand a necessary pre-condition redundant

However, it is also worth pointing out that there remains opposing case law to the effect that a demand for payment is not necessary for present debts to become due. This may not have been considered in depth in the Matthews case. In these circumstances, a creditor may find itself statute barred against the deceased’s estate if his proceedings did not issue within two years of the debtor’s death.

Conclusion

This judgment suggests that creditors can rest somewhat more easily. However, for Statute of Limitations Act purposes and on the basis that contractual documentation makes the sending of a letter of demand a necessary pre-condition to a lawsuit or cause of action, we would recommend that creditors still consider taking steps to protect their positions by issuing proceedings within the two years proceeding the borrower’s death.