Bankrupt husband applying for loan on wife’s behalf – Application falsely stating wife separated and employed – Lender granting loan secured by way of legal charge – Wife falling into arrears – Lender discovering fraud and seeking possession – Whether lender had constructive notice of fraud – Law of Property Act 1925, section 199 – High Court dismissing wife’s claim and ordering possession – Appeal dismissed
The defendant (W) and her husband (H) surrendered their matrimonial home after a possession order was made against them. They had been unable to keep up their mortgage repayments after H’s business failed and he was adjudged bankrupt. H applied to the plaintiff bank for a loan for his wife in order to purchase another home. He completed the application form falsely stating that W was separated from him and intended to purchase a house alone, and that she was employed as an executive distributor with a salary of £22,600. H did not attach the required wage slips or a P60 to the application form, but instead attached a fake letter, purportedly from W’s employers, addressed “to whom it may concern”, confirming W’s income and position. W signed the application form without reading it. The plaintiff did not accept the letter and wrote to the purported employer, who again falsely confirmed W’s salary and position. The plaintiff approved the application and W purchased a property in Sprowston, Norwich, for £63,995, funded in part by the advancement, which was secured by a legal charge. The property was registered in W’s name. She subsequently she fell into arrears with the loan instalments and the fraud was discovered. H pleaded guilty to conspiracy to defraud and was sentenced to three years’ imprisonment. The plaintiff obtained a possession order, which was set aside on the basis of the W’s defence. Judgment was given for the plaintiff and an order was made for possession of the property. The judge concluded that plaintiff was not an agent or subagent of H so as to be a vehicle for imputed knowledge of the fraud to the plaintiff and that, although there was a presumption of undue influence, the transaction was not to W’s financial disadvantage so as to raise a constructive trust. H appealed, contending, inter alia, that the plaintiff had constructive notice under section 199(1)(ii)(a) of the Law of Property Act 1925 of the fraud by virtue of its failure to make proper inquiries as to the true income.
Held The appeal was dismissed.
1. The purpose of section 199 of the Act was to enact the well established rule in Chancery as to constructive notice of equities affecting a legal title; that the purchaser was affected by what he eventually knows or what would have come to his knowledge if he made reasonable inquiry.
2. The plaintiff had not relied on the letter from the purported employer, but had requested specific confirmation, which had been answered in terms wholly unequivocal and which had confirmed all the relevant information in the application form. Such information was not required for the purposes of ensuring that the plaintiff obtained a good title to the security, which was the purpose of section 199, but related to the issue of whether to make a loan to H on the credit status information. The bank had made inquiries that were sensible in the circumstances. Accordingly, the bank could not be imputed with constructive notice of the fraud.
Karen Walden-Smith (instructed by Shoosmiths & Harrrison, of Northampton) appeared for the plaintiff; Marc Beaumont (instructed by Godfrey Morgan, of Norwich) appeared for the defendant.
Thomas Elliott, barrister
