Mortgage — Enforcement — Illegality — Legal charge over property — Sums expressed to be secured by charge not due in reality — Charge a sham to mislead creditors of chargor — Whether chargor entitled to removal of charge — Whether chargee entitled to payment of sums secured by charge — Whether chargee able to rely on charge notwithstanding illegality of underlying transaction
In 1996, the appellant agreed with the respondent vineyard owner, who was in acute financial difficulties, that he would negotiate a reduction of the respondent’s debts with the creditors in return for a remuneration of 20% of any reduction so achieved. The appellant was also given a 20% shareholding in a new company set up to run the vineyard business in return for helping to restructure that business. In 1997, the respondent executed a charge over the vineyard in favour of the appellant. The charge purported to secure £48,078 for professional services as invoiced plus further services up to a maximum of £50,000.
In 1999, the appellant made a demand for payment under the charge. The respondent asserted that the charge had never been intended to be enforced. In 2009, he brought proceedings for a declaration that the charge was void and for the deletion from the land charges register of the various entries pertaining to it. The appellant counterclaimed for payment of £75,376 pursuant to the 1999 demand and for possession of the property.
The judge found that the fees that the charge purported to secure were not due from the respondent to the appellant and that the charge was a sham intended to mislead and deceive the respondent’s creditors and protect the vineyard from them, which intention involved illegality. He accordingly made the orders that the respondent sought.
The appellant appealed. He contended that: (i) his property rights under the charge were enforceable since they were not vitiated by the illegal nature of the transaction by which they had been created; and (ii) the respondent, on the other hand, could not dispute the amount secured by the charge without impermissibly relying on his own illegality.
Held: The appeal was dismissed. The appellant was directly affected by the principle that the court would not assist a party to enforce obligations arising under an illegal contract. Although the rights that he relied on arose at law under a legal charge, he could not assert those rights without having also to rely on the underlying reason for the transaction. Even where a mortgage recites a loan and contains an acknowledgement of its receipt, the borrower can put in issue whether any, and if so what, amount is truly owing and secured. Accordingly, the appellant had to show not only that he had the benefit of a legal charge, but also that the respondent owed him money that was secured by that charge. The appellant could not prove that the respondent owed him money unless he alleged the agreement under which it was said to fall due. In seeking payment, and in claiming possession of the property to enforce his security, the appellant was, in substance, the party seeking to rely on and enforce the sham transaction and seeking the court’s assistance for that purpose. The court was entitled to investigate the legality of the transaction and, having found it to be illegal, should refuse to give effect to it in the appellant’s favour. The appellant was not entitled to any remedy under the charge because no money was due under it and it was not security for any debt. That being so, the respondent was entitled, as owner of the property, to have the entries relating to the charge removed from the register.
The following cases are referred to in this report.
Close Asset Finance Ltd v Taylor [2006] EWCA Civ 788; (2006) 150 SJLB 708
Mainland v Upjohn (1889) LR 41 Ch D 126
Snook v London & West Riding Investments Ltd [1967] 2 QB 786; [1967] 2 WLR 1020; [1967] 1 All ER 518, CA
Tinsley v Milligan [1994] 1 AC 340; [1993] 3 WLR 126; [1993] 3 All ER 65; (1994) 68 P&CR 412, HL
Vickers v Jackson [2010] EWHC 2213 (Ch)
This was an appeal by the appellant, Michael Jackson, from a decision of HH Judge Charles Purle QC, sitting in the Chancery Division of the High Court in Birmingham, allowing a claim by the respondent, Martin Vickers, for the removal of a charge against property and dismissing a counterclaim for its enforcement.
John Stenhouse (instructed under the public access scheme) appeared for the appellant; Myriam Stacey (instructed by Higgs & Son Solicitors) represented the respondent.
Giving judgment, Lloyd LJ said:
[1] The defendant, Mr Michael Jackson, appeals against an order of HH Judge Charles Purle QC dated 6 August 2010 by which Mr Jackson’s counterclaim was dismissed and, on the claim by Mr Martin Vickers, a charge dated 3 February 1997 by Mr Vickers in favour of Mr Jackson was declared to be void and various entries on the land charges register that had been made in order to protect it were ordered to be vacated. The judge held that the charge was a sham and was not intended to have any legal effect, and that the sums that it was expressed to secure were not, never had been and never would be due from Mr Vickers to Mr Jackson. Mr Jackson sought to challenge that finding on the appeal but he failed to obtain permission to appeal in that respect.
[2] The one point on which he was given permission to appeal by Patten LJ was to argue that no relief should be granted to Mr Vickers because to do so would enable him to take advantage of his own illegality, the intention of the sham transaction having been to deceive Mr Vickers’ creditors. Conversely, Mr Jackson asserted that in seeking to enforce his apparent rights under the charge he was unaffected by the doctrine as to the unenforceability of illegal transactions. As before the judge, Mr John Stenhouse appeared for the defendant appellant and Ms Myriam Stacey for the claimant respondent. The judge’s judgment is found at [2010] EWHC 2213 (Ch) having been given orally in Birmingham on 6 August last year.
[3] Because the factual issues are not in dispute on the appeal I can summarise the history quite briefly. Mr Vickers owned land at Upper Whittimere Farm near Stourbridge known as Halfpenny Green Vineyards. He had been a farmer and, in 1996, he was operating a vineyard business from that land. At the beginning of 1996, he was in acute financial difficulties. He came into contact with Mr Jackson and, in February 1996, agreed with Mr Jackson that the latter would negotiate a reduction of his debts with the various creditors, with an agreed remuneration of 20% of any reduction so achieved. At that time, Mr Vickers had a company called Halfpenny Green Vineyards Ltd, which went into liquidation in May 1996. For a short time, the vineyard business was operated by another company called Runbir Ltd but that seems to have ceased operation by the end of 1996. Instead, another company, Goform Ltd, was set up to run the vineyard business.
[4] In September 1996, Mr Jackson and Mr Vickers agreed that in return for Mr Jackson helping with efforts to restructure the funding of the vineyard operation, he would have a 20% shareholding in the new company, Goform, which was to have, and did have, an option to purchase the land from Mr Vickers. In fact, it seems that the shareholding was issued in the name of Mr Jackson’s son. Nothing turns on that.
[5] By early 1997, as the judge found, Mr Jackson was working to reduce the debts owed by Mr Vickers in return for being entitled to 20% of any saving that he was able to obtain and was also working on the Goform vineyard business in return for his 20% shareholding in the company. In that context, the charge was executed with a date of 3 February 1997. It refers in the first recital to Mr Jackson having provided and still providing professional services “as invoiced”, outlined in the agreement between the parties. The accepted value of the services to date was stated as £48,078. It was recited that Mr Jackson had agreed to provide further services up to a maximum consideration of £50,000. Mr Vickers was recited as having agreed to discharge those fees in consideration of Mr Jackson agreeing to the arrangement and not proceeding by litigation or otherwise to recover the fees. The charge was expressed to be for the £48,078 already due and a further sum of £50,000 or, I suppose, up to £50,000 with interest at National Westminster Bank’s base rate. The “loan” was expressed to be for six months and thereafter until 28 days’ notice in writing was given by Mr Jackson. It was properly executed as a deed. Steps were taken to protect it in the land charges registry, the land being unregistered.
[6] The judge held that this document was intended as a pretence, the motive being to ring-fence or protect the vineyard property from other creditors of Mr Vickers, and he held that no fees were in fact due from Mr Vickers to Mr Jackson nor were any such fees agreed to become payable in the future in return for further work done by Mr Jackson. Some invoices were prepared, but they were as unreal and as little intended to be taken seriously as between Mr Vickers and Mr Jackson as the charge itself.
[7] In May 1999, a solicitor acting for Mr Jackson gave 28 days’ notice under the charge demanding the payment of £48,078 plus £50,000. However, the matter went to sleep soon after that until 2004. In that year, in response to a letter from Mr Jackson pressing for payment, Mr Vickers responded that the charge had never been intended to be enforced. Again, the matter became dormant. It was revived when Mr Vickers started these proceedings in 2009.
[8] The claim form was issued on 13 May 2009. The particulars of claim assert that the charge was void and should be set aside and claim the vacation of the relevant entries in the land charges register.
[9] Mr Jackson’s defence and counterclaim served in July 2009 alleged that the fees had been agreed and were due and that the charge was genuine, was intended to have effect in accordance within its terms and was not a sham. By the counterclaim, Mr Jackson sought the payment of £75,376 that had been demanded in 1999 with interest and also an order for possession of the property. By the reply and defence to counterclaim, Mr Vickers in effect joined issue and repeated his case that the charge was a sham in defence to the counterclaim.
[10] Thus, taking the facts from the judge’s findings, the charge was expressed to secure amounts that were not due and never would be due, and neither Mr Jackson nor Mr Vickers intended the charge to have effect in accordance with its terms or indeed any effect at all as between them. The point of the execution of the sham document was to mislead Mr Vickers’ creditors into thinking that the land was incumbered by the charge and presumably therefore into supposing that there was no point in looking to it for payment of their debts whether by way of pressure on Mr Vickers directly or by applying, for example, for a charging order securing any judgment.
[11] Mr Stenhouse submitted at one point that this involved an offence under the Insolvency Act 1986, but, on examination, it became clear that that would have applied, if at all, only if Mr Vickers had become bankrupt, which he has not, so far as we are aware, so that it is unnecessary to consider that. It is not clear that anyone was to be defrauded by this particular pretence but certainly there was an intention to mislead and to deceive. Judge Purle proceeded on the basis that this involved illegality sufficient to bring into play the relevant legal principles. That is not challenged on appeal and I therefore proceed on that assumption.
[12] The judge held, as I say, that the charge was a sham in the sense described by Diplock LJ in Snook v London & West Riding Investors Ltd [1967] 2 QB 786, at p802C-D, as follows:
I apprehend that, if it [that is to say sham] has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.
[13] In that case, two parties to the transaction were complicit in the pretence but the third party was not. The third party was the party deceived, or one of the parties deceived. Accordingly, the transaction was not a sham because that party intended it to have the effect that it was expressed to have. Any transaction that is a sham is likely to have an element of illegality, at least in the sense of an intention to mislead or deceive if not actually to defraud. As against an innocent party that may not be significant in itself because the complicit parties are likely to be held to their expressed intentions. As between the complicit parties alone the issue may be different. That is the present case and it was also the case in the now leading case on the application of the principle of illegality, Tinsley v Milligan [1994] 1 AC 340, where the House of Lords, by a majority of three to two, restated the law as to the consequences of illegality. In that case, the parties, two single women, had purchased a house in the name of the claimant but on the basis that both of them were to be beneficial owners, the intention being to enable false benefit claims to be made by the defendant that were subsequently made. The parties fell out and proceedings ensued, the respondent seeking possession and asserting sole ownership and the appellant counterclaiming for a declaration as to her joint beneficial interest and an order for sale. The defendant succeeded at all levels but for different reasons. The majority in the House of Lords rejected any test by reference to whether the public conscience would be affronted by the success of one claim or the other.
[14] The majority drew a distinction between the enforcement of a contract not yet fully performed, if tainted by illegality, on the one hand, and the enforcement of vested property rights, even if acquired under a transaction affected by illegality, on the other. So far as the first is concerned, Lord Jauncey said, at p366C:
it is trite law that the court will not give its assistance to the enforcement of executory provisions of an unlawful contract whether the illegality is apparent ex facie the document or whether the illegality of purpose of what would otherwise be a lawful contract emerges during the course of the trial.
To the same effect, Lord Browne-Wilkinson said, at p369C:
Neither at law nor in equity will the court enforce an illegal contract which has been partially, but not fully, performed.
Lord Lowry agreed with them both in terms.
[15] That proposition was not in doubt in Tinsley. The debate and the difference of view was as to whether the defendant in that case had to rely on illegality to make good her claim to a beneficial interest. Lord Browne-Wilkinson set out the position at law, at p370C-D, as follows:
From these authorities the following propositions emerge: (1) property in chattels and land can pass under a contract which is illegal and therefore would have been unenforceable as a contract; (2) a plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right; (3) it is irrelevant that the illegality of the underlying agreement was either pleaded or emerged in evidence: if the plaintiff has acquired legal title under the illegal contract that is enough.
[16] He then went on to consider the position in equity and to hold that it was the same as the position at law, at p376. I do not need to cite that passage.
[17] In the present case, the rights relied on by Mr Jackson arise at law. He has the benefit of a legal charge and he claims to enforce it as security for what he contends is due and secured by it. He relies on Tinsley and the proposition that, where property rights have been created or transferred, the illegal nature of the transaction under which that happened does not vitiate the creation or transfer of the rights or affect the enforcement of the rights arising. So, argued Mr Stenhouse, Mr Jackson has the benefit of a perfected and valid legal charge. He can assert and rely on the rights that it gave him without having to rely in any way on the underlying reason for or purpose of the transaction as part of which it was created. It is Mr Vickers, he argued, who has to plead and rely on the illegality in an attempt to defeat the rights of the mortgagee, so, submitted Mr Stenhouse, Mr Vickers is not entitled to do.
[18] However, Mr Jackson has to show not only that he has the benefit of a legal charge but also that there is money owing to him by Mr Vickers that is secured by the charge. It has for many years been established that even if the mortgage recites a loan and contains an acknowledgement of its receipt it is open to the borrower, or to anyone else interested in the mortgaged property the subject of the mortgage, to put in issue whether any and, if so, what amount is truly owing and secured: see Mainland v Upjohn (1889) LR 41 Ch D 126 and more recently Close Asset Finance v Taylor [2006] EWCA Civ 788* cited in Fisher and Lightwood Law of Mortgage (13th ed), in para 54.11. In Close Asset Finance, the issue arose at a preliminary stage, but here the evidence has been heard and the factual issue resolved. The judge has held that, in truth, there was no sum due from Mr Vickers to Mr Jackson by way of the professional fees that were recorded as being secured by the mortgage. Mr Stenhouse accepted that proposition in general but argued that the mortgagor was not entitled to dispute the claim recorded in the mortgage if it required him to assert his own illegal conduct. The issue is therefore whether Mr Vickers is disentitled from disputing Mr Jackson’s assertion as to the amount secured on the ground that he, Mr Vickers, has to rely on his own illegality. In principle, the statement that £48,078 was due is no more conclusive than was the recital of the £54,000 loan in Close Asset Finance. Subject to Mr Stenhouse’s point as to Mr Vickers being disqualified from taking the point by his own illegality, which he would have to allege, it seems to me that Mr Vickers is entitled to put in issue whether any sum at all is or ever was due from him to Mr Jackson that was to be secured by the charge.
[19] The judge dealt with this aspect of the case at the end of his judgment from [50] onwards. Without having had to be referred to cases such as Mainland or Close Asset Finance, he identified the point to which I have referred in [52] and [53], which I will read:
52. What Mr Jackson has to do is to demonstrate that something is due under the purported charge. He has not demonstrated that because the charge is a sham, as are the underlying invoices. Even if I accept, as I am invited to do, the charge at face value, it is not to be assumed all these years later that even if anything was due it still remains due. Once one embarks upon the inquiry as to what is due then that necessarily takes us into the genuineness of the original invoices, which are mere pieces of paper not intended to have any legal effect. What is more, to the extent that any of them have been acknowledged, they have been acknowledged in the name of Runbir Limited and not in the name of Mr Vickers. The acknowledgement in the charge suggesting something different is ineffective, because that, as with the rest of the document, is a sham, not intended by either of the parties to have legal effect. 53. It seems to me, therefore, that all Mr Vickers is doing is relying upon his ownership and his right to have the land charges and other entries protecting the purported charge removed, because there is nothing due, and never was. A charge can only come into or remain in being if there is some genuine indebtedness, actual, prospective or contingent, which it secures. That is inherent in the concept of a charge, which is a security for an obligation. If there is no obligation, there is no charge. Here, there never was an obligation which the charge was intended to secure. Therefore, there is no charge. The parties never intended there to be a charge.
[20] For Mr Jackson, Mr Stenhouse argued that it is not open to Mr Vickers to assert his own illegality even by way of defence if Mr Jackson had started the proceedings. He went so far as to say that the judge should not have allowed Mr Vickers to give evidence of illegality and that this would have been the position even if Mr Jackson had sued Mr Vickers for payment of the fees alleged to be due simply as a personal unsecured obligation. He accepted that there was no statement in any decided case to the effect that a defendant to a claim is disentitled from giving evidence of the illegality of himself and the claimant but he argued that it must follow from the general statements of the principle. I cannot accept that argument.
[21] In a simple case of A suing B on a contract that is apparently lawful, claiming the payment of sums due, for example for services rendered, it is open to B to prove that the agreement was illegal because the services rendered, if any, were inherently illegal, even though that requires B to assert and prove that both he and A were parties to an illegal agreement. Equally, it is open to B in such a case to show that the contract was a sham intended to deceive or defraud some third party. If the defendant was not entitled to put forward such a case and adduce the evidence because it involves him in asserting his own as well as the other party’s criminal conduct, then it seems to me that Lord Jauncey’s first proposition, which I have quoted, could hardly ever apply.
[22] Mr Stenhouse’s other point, coming closer to the facts of the present case, is that here Mr Vickers was not, or not only, in the position of a defendant but had brought the proceedings himself, which Mr Jackson defended and in respect of which he asserted his own rights by way of counterclaim. Accordingly, Mr Stenhouse submitted, it is Mr Vickers primarily and he would say solely who is affected by the proposition recorded in the short passage from Lord Jauncey’s speech that I have quoted above. It is of course true that the proceedings were initiated by Mr Vickers and that Mr Jackson is both a defendant and a claimant by way of counterclaim. It is also true that the cases show that it may sometimes matter which out of two parties to an illegal dealing seeks the court’s assistance.
[23] So far as the position as between Mr Vickers as claimant and Mr Jackson as counterclaiming defendant is concerned, it seems to me that Mr Jackson was in substance the party seeking to rely on and enforce the transaction and seeking the court’s assistance for that purpose. Mr Vickers sought to clear his undoubted title from encumbrances by way of the land charges register entries. Mr Jackson, on the other hand, asserted that there were sums due to him from Mr Vickers that were secured by the charge. He sought payment of those sums and he sought possession of the mortgaged property in order to enforce his security. On that basis, it seems to me, it is Mr Jackson who is directly affected by the principle that the court will not assist a party to enforce obligations arising under a contract that in truth is illegal. Mr Jackson cannot, in my judgment, prove that Mr Vickers owed him any money, because to do so he has to allege the agreement under which it fell due and, evidence having been brought before the court, the court is entitled and indeed no doubt bound to investigate the legality of a transaction and, if satisfied that it was illegal, the court must refuse to give effect to it in favour of the party seeking its assistance to enforce such contract.
[24] It follows, as it seems to me, that Mr Jackson is not entitled to any remedy under the charge because no money is due under it. It is not and never can be security for any debt. Once that is established, Mr Vickers is entitled as owner of the property to have the entries relating to the charge removed from the register. Otherwise, as the judge said, his present creditors would be at least misled and possibly adversely affected by the presence on the register of entries relating to a charge that in reality secures nothing.
[25] For those reasons, I consider that the judge was entirely right in his decision and his reasoning on the point and I would dismiss the appeal.
Carnwath LJ said:
[26] I agree.
Maurice Kay LJ said:
[27] I also agree. Accordingly the appeal is dismissed.
Appeal dismissed.
