Bridging loan – Legal charge – Undue influence – Appellant granting short-term loan to enable respondent to annul bankruptcy – County court finding that second respondent agreeing to legal charge as joint beneficial owner of property as result of undue influence – Whether judge having sufficient evidence to make finding of undue influence — Appeal dismissed
The respondent unmarried couple, who were in a long established relationship and had a teenage son, were the joint registered proprietors of a house of which they were assumed to be equal beneficial owners. The house, which was subject to a first charge in favour of a bank was valued at £800,000. The respondents’ equity in the house at the relevant time was around £430,000, so a half-share was therefore worth £215,000.
A bankruptcy order was made against the first respondent. The amount of his beneficial interest in the house was sufficient to pay his creditors and he sought an annulment of the bankruptcy. To that end, the appellant company agreed to provide short-term bridging loans to be secured by a second charge. Once that funding was in place, the first respondent’s bankruptcy was annulled.
The respondents subsequently failed to find a mortgage company that was willing to provide funds to repay the appellant, which therefore commenced proceedings seeking possession of the house and the repayment of the full amount of the loan.
The second respondent contended that the charge in favour of the appellant should be presumed to have been entered into as a result of undue influence on the part of the first respondent. The county court accepted that contention and held that the appellant was bound by that fact such that the charge against the second respondent should be set aside. Furthermore, the second respondent was not liable as a joint debtor by way of an unsecured loan.
The appellant appealed, contending that: (i) it was not open to the judge to find that there was actual undue influence when the second respondent had relied on presumed undue influence; (ii) there was insufficient evidence to make a finding of actual undue influence; and (iii) the judge had been wrong not to sever the loan from the security .
Held: The appeal was dismissed.
(1) The presumption of undue influence was a rebuttable evidential presumption. It arose where the nature of the relationship between two parties, coupled with the nature of the transaction between them, was such as to justify, in the absence of any other evidence, an inference that the transaction was procured by the undue influence of one party over the other. That presumption shifted the onus onto the dominant party, who was required to adduce sufficient additional evidence to rebut the presumption. However, where a full trial had taken place, the judge had to decide on the totality of the evidence before the court whether or not the allegation of undue influence had been proved. If the presumption applied and the evidence was not sufficient to rebut it, an allegation of undue influence would succeed.
The present case had gone to full trial. The judge had had to decide on the totality of the evidence whether undue influence had been proved. That was what the appellant had specifically invited the judge to do and it was not procedurally unfair for the judge to determine whether all the evidence led him to find that actual undue influence had been established. The appellant could not complain about the course the judge had followed. Its real complaint was that the judge had found undue influence – the appellant had hoped to persuade the judge otherwise: Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44; [2002] 2 AC 773 applied.
(2) It was irrelevant whether the facts of the instant case were analysed as an instance of undue influence arising from the undue pressure applied by the first respondent on the second respondent or as a case of misrepresentation, as a result of him unwittingly misleading her as to the character of the transaction. It was clearly established that the principles that applied as to when a lender was put on inquiry, and as to the reasonable steps it should take to avoid being affected by notice, were equally relevant in cases of misrepresentation and in other cases of undue influence. On the findings of fact, this was, at least, a case of unwitting misrepresentation and the second respondent was entitled to set aside the transaction as against the first respondent. She was also entitled to set aside the transaction as against the appellant because the judge had held that it had had the necessary constructive notice and there was no appeal against that finding: Barclays Bank plc v O’Brien [1994] 1 AC 180 considered.
(3) The judge had found that the loan and the charge had been affected by the relevant undue influence. Accordingly, no question arose of severing a part of the transaction that was not affected by undue influence or misrepresentation.
Nicola Allsop (instructed by Gately Wareing LLP) appeared for the appellant; the respondents appeared in person.
Eileen O’Grady, barrister
