Wife having small shareholding in husband’s business – Wife sole owner of matrimonial home – Husband persuading wife to mortgage home to finance business expansion – Husband exercising undue influence – Judge finding that mortgagee ought reasonably to have known of risk to wife – Appeal by mortgagee – Whether mortgagee obliged to communicate “special facts” to wife’s solicitor – Appeal allowed
In 1986 the defendant husband and wife jointly acquired a house in London SW6, as a family home. In early 1990 the husband, then in highly paid employment, decided to incorporate a company to acquire a fish-processing business in Scotland for the sum of £185,000. Initial capital was provided as to £50,000 by the husband and as to £100,000 by a loan from South West Scotland Investment Fund Ltd (SWIFT). The plaintiff bank provided an overdraft facility of £100,000 secured by a bond and a floating charge over the company’s assets and a guarantee limited to £100,000 from the husband. 11.8% of the share capital of the company was allocated to the wife. In September 1990 the house was transferred into the sole name of the wife, who had been given to understand that the home would thereby be protected should liability be incurred under the guarantee.
In early 1991 the husband sought a further facility from the bank in order to finance the building of a new processing factory, and in May of that year left his employment in order to devote his full time to the company. The bank agreed to increase the overdraft facility to £400,000 requiring, inter alia, a joint and severable guarantee from the defendants for £150,000 and a second charge over the London house. SWIFT agreed to advance a further £250,000 secured by a fixed heritable security over the new factory, which ranked ahead of the bank’s floating charge and the bank’s standard security (the ranking agreement). The bank instructed the husband’s solicitor, P, to secure the obligations of the defendants, at the same time forwarding a copy of its standard instructions. These stated, inter alia, that the bank expected the mortgagor to be advised on the nature and effect of the charge and to be made fully aware that the charge was for all sums due by the defendants. P gave no advice specifically directed to the position of the wife as co-guarantor and sole owner. The guarantee and the charge were duly executed by the defendants and the wife’s shareholding was increased to 41.5%. However, the company failed and the bank appointed receivers. The bank claimed possession of the home pursuant to the charge and obtained judgment against the husband. The wife, relying on Barclays Bank plc v O’Brien [1994] AC 180, claimed that her signature to the guarantee and the charge had been obtained by undue influence on the part of the husband, in circumstances that had put the bank on constructive notice . The trial judge found in favour of the wife, and the bank appealed.
Held The appeal was allowed.
1. There were no grounds for upsetting the judge’s finding that undue influence had in fact been exercised by the husband. As the bank had no actual knowledge the issue was whether that matter would have come to its knowledge if it had made such inquiries as ought reasonably to have been made: see Law of Property Act 1925 section 199(1). The bank, accordingly, had to show that there were no such inquires to be made, ie that the known facts had not put it on inquiry.
2. Differing from the trial judge, the court was satisfied that the bank was entitled, on the totality of the facts known to it, to take the view that there was no real risk of the wife’s apparent consent having been improperly obtained. In the absence of other facts known to the lender a transaction by which a wife is asked to provide a guarantee or collateral security for the debts of a business from which the family derives its income cannot be said to be extravagantly or even necessarily improvident: see Royal Bank of Scotland v Etridge (No 2) [1998] 4 All ER 705; [1998] PLSCS 239. There was no evidence to support the judge’s finding that the bank was aware, at the time of making the advance, of the defendants’ respective shareholdings or of the wife’s sole beneficial ownership of the house. Nor was this a case of a bank seeking security in the face of impending disaster, the bank being satisfied at the time that the venture had real prospects of success.
3. Moreover, since the defendants had been dealing with the bank through a solicitor, the bank was entitled to assume that P would advise the wife on all relevant matters, including whether it was necessary to obtain independent legal advice: see Etridge (supra). It would have been otherwise if the bank, knowing of special facts critical to the wife’s decision-making, had no reason to believe that the solicitor was aware of them. However, this was not such a case. Contrary to the opinion of the trial judge, there was no reason for the bank to inform the solicitor of the disparity between the development costs and the ultimate value of the new factory, nor of the priorities established by the SWIFT ranking agreement. The bank was entitled to assume that P would not purport to advise his client without first informing himself as to the company’s financial position.
Mark Hapgood QC (instructed by Underwood & Co) appeared for the appellant; Nicholas Yell (instructed by Jenkin Evans, of Reading) appeared for the respondent.
Alan Cooklin, barrister
