Bank offering finance facility to company owned by defendants – Defendants to act as guarantors – Bank obtaining valuation of company properties to be secured – Bank official knowingly misrepresenting basis of valuation to superiors and to defendants – Whether defendants thereafter acting in reliance on representation – Meaning of ‘induced’
The defendants were the only shareholders in Regent Leisure Time Ltd (the company). In early 1992 the company applied to the claimant bank for a £2.025m loan for the purpose of acquiring a leisure complex and a night club in Newquay, Cornwall, and proposed as security those two properties together with a third that had been recently acquired. On 3 March 1992 the company received from M, a manager of the bank’s acquisition finance department, details (without commitment) of a “funding package”, whereby the requested advance would be made on the security of: (a) the three properties that had been offered; and (b) the personal guarantees of the defendants, these to be in turn secured by charges on their respective matrimonial homes. The package was subject to the precondition that the bank should be satisfied with an independent valuation of the three properties at no less than £3.5m, such value to be taken on a forced sale basis (FSV), meaning, for the purpose of the package, a sale within six months.
On 26 March 1992 M, who was particularly anxious to conclude the deal with the company, received a report from valuers engaged by the bank. The report put the aggregate value of the properties at £3.5m. M was orally informed by the valuers that a forced sale figure would lie between 50-70% of the figure so reported. On the same day, one of the defendants inquired over the telephone whether the security was sufficient. M replied that it was “just enough”. On 31 March 1992 M submitted a report to his superiors, which showed £3.5m as the FSV figure. On the following day the documents required by the package were executed and the company drew down £2.025m. The company did not prosper, and, on 13 Februrary 1995, the bank instituted proceedings, claiming repayment under the terms of the defendants’ guarantees. The defendants sought to disclaim liability on the ground that their decision to buy the Newquay properties and to furnish the guarantees had been induced by a misrepresentation fraudulently made by M that the figure of £3.5m had been arrived at on an FSV basis. The judge, having found that M had knowingly made a false representation, nevertheless rejected the defence on two grounds: first, that M did not intend and had no reason to believe that the defendants would rely on the representation; and second, that in any event no such reliance had taken place, as the defendants’ only concern was that the bank should accept the proposed securities. The defendants appealed.
Held: The appeal was allowed
1. The first reason advanced by the judge could not be supported on the evidence, which disclosed that M, while anxious to obtain the approval of his superiors, was also concerned that nothing would deter the defendants from proceeding with the deal.
2. Once it was shown that a representor fraudulently intended the representee to act on the misrepresentation and that the representee had so acted, there was a strong presumption that the steps taken by the representee had indeed been induced by the misrepresentation. The burden accordingly lay on the representor to show that no such inducement had occurred: see Smith v Chadwick (1884) 9 App Cas 187 as affirmed in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Ltd [1995] 1 AC 501 at p542. It was not enough for the bank to show that the defendants had already decided, finance permitting, to proceed with the project. Liability could also be based on the representation having induced the representee to persevere in a decision already reached, and was so incurred when a false answer was given to a question that went to the belief underlying the decision: see Australian Steel & Mining Corpn Pty Ltd v Corben [1974] 2 NSWLR 202.
Dirik Jackson (instructed by Blight, Broad & Skinnard, of Saltash) appeared for the appellant defendants; Nicholas Elliot QC and Ian Wilson (instructed by Dibb Lupton Alsop, of Leeds) appeared for the respondent plaintiff.
Alan Cooklin, barrister
