Money lent to friendly society by investment company and advanced by society on mortgages which were then promptly assigned to the investment company–Court of Appeal refuses to disturb county court judge’s finding that company was not caught by Moneylenders Act.
These were
appeals by Mr Alan George Wilson and Mr Smith Ogwo Udeala, defendants in one or
more of three actions which were decided together by Judge Coplestone-Boughey
at Wandsworth County Court on June 2 1975, all three cases raising the same
point. In two of the actions the judge awarded Sewing Machine Rentals Ltd
orders against Mr Wilson and Mr Udeala for possession of 3 Craster Road,
Brixton Hill, London SW2, and 69 Broughton Street, Putney, London SW8,
respectively, together with judgment for £15,939 and £12,473 claimed as
outstanding on legal charges over the respective properties. In the remaining
action the judge granted Morlen Investments Ltd an order against Mr Wilson for
possession of 39 Wingford Road, London SW2, together with judgment for £10,790.
Mr T Lloyd
(instructed by Benjamin & Benjamin) appeared for the appellants, and Mr N
Primost (instructed by Leonard Ross & Craig) represented the respondents.
Giving the
first judgment, SCARMAN LJ said that in each action the plaintiffs sued as
assignees of a legal charge over the relevant property, relying on the ground
that the defendant had failed to make the payments due under the charges. The
defendants conceded failure to make the appropriate payments, but alleged in
each case that the moneys secured were in fact moneys lent by the plaintiffs to
them and lent by the plaintiffs in the course of a business of money-lending, a
business which they had no licence to carry on. They (the defendants) therefore
counterclaimed a declaration that the respective charges were void and
unenforceable, rectification of the register in the land registry and
delivery-up and cancellation of the charge. Thus there were two issues for the
county court judge to consider. The first was, did the plaintiffs lend the
money? The second was, if they did, did
they do so in the course of carrying on an unlicensed money-lending
business? These were both questions of
fact. The judge resolved them in favour of the plaintiffs, finding that the
plaintiffs did not lend the money to the defendants and were not engaged in the
business of money-lending. The Court of Appeal had heard extensive and detailed
argument over a period of days directed to the first issue, whether the
plaintiffs had lent the sums in question to the defendants, it being conceded
that if the transactions were not such loans there was no need to consider the
second point. The transactions all arose in 1973, before the collapse in the
property market, and it was necessary to consider their course in a little
detail. The actions were most carefully tried by the county court judge, who
accepted that before reaching his conclusion he must look at the substance as
well as the form of the transactions, and founded his judgment upon certain
basic conclusions of fact. The Court of Appeal should disturb the judgment only
if sure. Nevertheless the court had had the benefit of a very detailed and careful
argument by Mr Lloyd for the appellants, challenging in a number of respects
the finding of the judge.
The story
began with the formation in 1969 of a friendly society called the Berkeley
Assurance Society, formed to offer its members insurance business, no doubt at
attractive rates, and to augment a capital fund for the benefit of the society,
to be derived from insurance business. Early in 1973 a Mr Hart became the
secretary of the society, and at the same time there went on to the executive
committee of the society Mr S B Gilinsky, a solicitor, and Mr Benny Harris, an
investment consultant. These men were plainly influential in guiding the
friendly society into the business of lending money upon mortgages of
dwelling-houses. This was a business which was open to the society because,
being a registered friendly society, it was excluded from the definition of
money-lender to be found in the Moneylenders Act 1900. The society did not
however possess sufficient funds of its own to be able to finance this class of
business. Accordingly Mr Harris, who was clearly very experienced in this class
of work, made it his job not only to discover borrowers who were wanting the
facility of a mortgage but persons who would be prepared to provide the society
with the funds enabling them to enter into mortgage transactions.
Mr Harris
relied to a great extent in his search for capital upon a number of businesses
that appeared to have been centred at 30 Great Portland Street. That address
was used by a number of so-called investment or finance companies who from time
to time had money available for investment in mortgage or other types of
business. The two plaintiff companies were interested in investment and made
use of the services of Mr Harris as an investment consultant. If there was a
transaction which interested the Berkeley Assurance Society and, through Mr
Harris, the investment company, the latter would provide the money upon the
basis of a short-term loan to the society. Supplied with funds in this way, the
society would then take a legal charge from the borrower and make the
appropriate advance. After the charge had been executed the society would then
transfer the charge by way of assignment to the investment company. The view of
the transaction that arose from a consideration of its form was that the
investment company was making a short-term loan to the friendly society so that
the society itself could lend the money to the borrower, and when the mortgage
transaction had been completed the investment company bought the mortgage by
accepting a transfer of it and allowing its loan to the society to be
extinguished in consideration of the transfer.
Mr Lloyd
submitted that the case of Sewing Machine Rentals v Wilson and
another was typical and that sufficient was known about it to enable him to
show that the substance of the transaction was not as he (his Lordship) had
described it, but simply one of direct loan from the investment company to the
borrower. On July 10 1973 Mr Gilinsky, acting for the Berkeley Assurance
Society, wrote to Mr Wilson to say that his clients were prepared to make an
advance of £10,500 repayable in six months at the rate of 3 per cent per month,
ie 36 per cent per year. There was a clause that the borrower would effect a
whole life insurance protection policy in a sum of not less than £10,500. On
July 20 the investment company paid to Mr Gilinsky on account of this
transaction a sum of £10,858, and that cheque was paid to the credit of Mr
Gilinsky’s clients’ account under the name of AG Wilson. The charge was not
taken until July 25, when Mr Wilson charged 3 Craster Road with the repayment
of the money expressed to be lent to him by the Berkeley Assurance Society. On
the very next day the trustees of the assurance society, who were Mr Gilinsky
and a surveyor, Mr Rabin, transferred the charge by way of assignment to the
investment company. This transfer was said to be in consideration of the sum in
fact previously advanced. There was a letter of July 30 by the investment
company addressed to Mr Wilson requiring him to pay interest to them and
providing him with a paying-in book for that purpose.
One of the
other actions, Morlen Investments v Wilson and another, was a
short-term transaction. The other action, Sewing Machine Rentals v Udeala,
concerned the only long-term mortgage of the three. The mortgage obtained from
the society, who themselves obtained the funds from the finance company, was
for 15 years at a rate of 14 per cent per annum. In both these cases there were
retention moneys, the money advanced having deducted from it a sum retained for
doing certain work. The county court judge came to the conclusion that the
substance or reality of these transactions did in fact concur with their form.
If their form did reflect the substance, then the plaintiff companies were not
lending money to these defendants. They were taking an assignment of a legal
charge from the friendly society. They must therefore inevitably win. The judge
found that the friendly society was free to accept or reject proposals put up
to them by would-be borrowers and were interested in these transactions as
principals, lending money and obtaining the benefit of the premiums paid in
respect of mortgage insurance. It was difficult to fault the judge’s findings
of fact, but Mr Lloyd put his case in two ways. He said that on the true view
of the substance of these transactions they were loans made by the plaintiff
companies to the defendants; secondly, he said that if there was no direct loan
the friendly society were in reality the plaintiffs’ agents, and that the
elaborate sets of documents produced existed to conceal the truth.
Certainly upon
the judge’s findings it was clear that the investment company provided the
necessary funds before the charge was taken. In the case of 3 Craster Road, it
was clear that when the funds were received by Mr Gilinsky, solicitor to the
friendly society, they were placed at once into a clients’ account earmarked
for the borrower. It was
followed very rapidly after the execution of the charge was an inaccurate
document in certain respects. Next, Mr Lloyd referred to the fact that at a
very early date, and in one case certainly before the registration of the
transfer, the investment company was writing to the mortgagor demanding payment
of interest direct to them. Again, Mr Lloyd pointed out that the investment
companies were interested in the retention moneys. In fact the retention moneys
had never been released to the borrowers. Mr Lloyd made the point that one
would not expect an assignee to be interested in the retention moneys; these
were very much a matter for the original parties to the loan and to the charge.
Mr Lloyd criticised the judgment for having failed to give sufficient attention
to these factors, and in particular he criticised it for a total lack of
reference to the clients’ account entry in the 3 Craster Road case. There was
also one other specific criticism, that when the judge was considering what
constituted a sham document and considering some of the decided cases upon that
point, he was thinking that the documents in this case could not be different
from the substance of the transaction unless the borrower knew about it. In his
(Scarman LJ’s) view, this was a misconception, and the court was not concerned
with what the borrower knew or did not know.
Nevertheless,
giving all due weight to the various matters upon which Mr Lloyd had relied,
they were no more than pointers to the truth. Not one of them could be
decisive. They must be assessed in the context of the whole picture. The judge,
whether or not the fact of the clients’ account had slipped his mind, gave
manifestly careful attention to factors which were of greater critical
importance. With a few limitations, he accepted as reliable the evidence of Mr
Marcus (director of Sewing Machine Rentals) and Mr Leonard Harris (director of
Morlen Investments and not to be confused with the Mr Benny Harris already
referred to), and the evidence of Mr Gilinsky. He found that notwithstanding
their protestations to the contrary, they did go into this type of business in
order to avoid the mischief of the money-lending statutes. He also found,
notwithstanding a different view held by Mr Gilinsky, that once the friendly society
had advanced the money to the borrower it was under an obligation to make a
transfer of the assignment of the legal charge thereby obtained to the
investment company. Mr Lloyd was justified in saying that the judge did not
accept in toto the evidence of these three witnesses, but the fact was
that he accepted enough to put Mr Lloyd’s case out of court. He accepted that
neither Mr Marcus nor Mr Leonard Harris was in the business of making direct
loans. He found as a fact that they had no intention of doing anything of the
sort, and that the business which they saw themselves as carrying on was that
of buying mortgages. He accepted that the friendly society was not a mere form,
but an independent agent with an interest in the transaction. He fairly commented
that these investment companies had no idea as to the identity of the borrower,
and had no direct negotiation with the borrower until after the transfer of the
charge. He (his Lordship) thought that there was no ground upon which the court
could disturb the finding of the judge that there was no direct loan proposed
or made by the investment companies to any of the defendants.
That left Mr
Lloyd with his alternative way of putting his case. He submitted that the
investment companies really left their investments to be handled by the
consortium of Mr Gilinsky, Mr Hart and Mr Harris, of the friendly society, and
he invited the court to look at the way in which this consortium insisted on
getting the money from the investment company before it would consider or make
a loan to the defendants. Again there were pointers in the evidence which might
lead one to wonder whether that was not a fair overall way of looking at the
relationship between the plaintiff companies, the friendly society and the men
concerned with the friendly society. In order that a relationship of agency
should exist, both parties must expressly or impliedly assent to its existence.
There was here no evidence, other than these pointers, of any such
previously-existing agreement. In his (Scarman LJ’s) opinion, the county court
judge was abundantly justified in refusing to find that the friendly society
was an agent to make loans to these borrowers on behalf of the plaintiff
companies, and the appeals should accordingly be dismissed.
SIR GORDON
WILLMER said that he had found this a difficult and perplexing case. It would
be very tempting to draw the inference that the transactions which the court
had been examining were in substance money-lending transactions, in the sense
that the plaintiffs were lending money direct to the borrowers, and that the
elaborate procedure adopted was no more than a facade to give an appearance of
respectability to what were really illegal transactions. The county court judge
himself said he was prepared to draw an inference that the plaintiffs’ motive
was to evade the requirements of the Moneylenders Acts. But he went on to say
that the plaintiffs’ motive was itself irrelevant, and that what was to be
examined was the nature of the agreements into which the parties entered, not
the object of those agreements. If it were true that the whole of this
elaborate procedure was no more than a sham, it would clearly be necessary to
conclude that the Berkeley Assurance Society were parties to the sham.
Attractive as it might be to take that short cut, the county court judge had
had the benefit of hearing in the course of a prolonged trial a considerable
volume of oral evidence. In particular he heard Mr Hart, Mr Gilinsky, Mr Marcus
and Mr Leonard Harris. There was another Mr Harris, Mr Benny Harris, who did
not give evidence. He was no relation to Mr Leonard Harris and must not be
confused with him. If the defence were right, and the whole of this structure
was an elaborate sham, it would have been necessary for the judge to find that
all four of these witnesses were telling lies. This he was evidently not
prepared to do. On the contrary, having heard all this evidence at no little
length, he found in favour of the plaintiffs that what was done did not fall
within the ambit of the Moneylenders Act.
The court was
now invited to reverse that finding, and to do so upon the strength of various
documents and such inferences as might be drawn from those documents, but
without having had the advantage of hearing the oral evidence. It was well
established that in circumstances of this character the court would only
interfere if convinced that the judge came to the wrong conclusion. There were
to be found in the documents certain discrepancies and pointers which at least
promoted suspicion. There was the fact that in two of the three cases the
plaintiff companies in making their advances to the friendly society deducted
at source the amount fixed by the society for retention against the cost of
such repairs as were required to be carried out by the borrowers. Secondly,
there was the circumstance that in the case of the loan made to Mr Wilson in
respect of his house at 3 Craster Road the cheque paid by the plaintiffs to Mr
Gilinsky, who presumably intended to pay it to the Berkeley Assurance Society,
found its way through Mr Gilinsky’s hands into a clients’ account, earmarked
for Mr Wilson. That was five days before the date of the legal charge
purporting to be created by the society as between themselves and Mr Wilson.
Thirdly, there was the incident in relation to the house at Wingford Road,
Morlen Investments writing to Mr Wilson enclosing his paying-in book for the
satisfaction of his periodical payments nearly a month before the date of the
transfer from the Berkeley Assurance Society to the plaintiffs. There was an
alternative way in which the case was put, which was that the plaintiffs were
using the society as their agents to make these loans to the ultimate
borrowers. There were circumstances, however, more consistent with the view
that the society was acting in its own interests and in the furtherance of its
own business.
It was
difficult to be sure. He (his Lordship) might or might not have come to the
same conclusion as the judge, but he was certainly very far from convinced that
the judge came to a wrong conclusion. In the light of the authorities, he must
agree that the appeals should be dismissed.
CAIRNS LJ said
that he also agreed, for the same reasons.
The appeals
were dismissed with costs. Leave to appeal to the House of Lords was refused.
Orders were made for possession within 28 days.
