Mortgage – Breach of trust – Solicitors – Solicitors at appellant firm retained by company to act for it on sale of plots of land – Company granting registered charge to nominee of purchaser – That charge in fact a sham designed to defeat interests of respondent bank under mistakenly unregistered charge securing lending to company – Appellant completing sale in knowledge of respondent’s unregistered charge – Whether appellant dishonestly assisting in breach of trust – Appeal allowed
M and D were two solicitors at a firm which was retained by a development company in connection with a sale of three undeveloped plots of land (plots 2, 3 and 4) in Stourbridge, West Midlands. M acted for the company on the sale under the supervision of D. The plots had earlier been charged to the respondent bank as security for a loan facility of £1.99m granted to the company. However, owing to a failure by the bank’s solicitor to register the charge at the Land Registry, it took effect not as the intended legal charge but only in equity.
In the course of negotiating the sale transaction, the company became aware of the non-registration of the bank’s charge. It then executed a first legal charge to an individual (H), which purported to secure a loan of £600,000. That charge was registered at the Land Registry such that, on its face, it took priority over the bank’s charge.
M and D subsequently moved to the appellant firm of solicitors, where they continued to deal with the sale. A Land Registry search carried out by M revealed the existence of H’s registered charge and its date, but not the amount secured by the charge. M was informed by the purchaser’s solicitor that the sale of plots 3 and 4 was in part satisfaction of a debt due to H, as nominee for the purchaser. The sale of plot 2 was completed in April 2008 and the sale proceeds remitted to the purchaser’s solicitor. Thereafter, the issue of the bank’s charge arose in correspondence and the bank’s solicitor informed M that he was immediately arranging to register that charge. M replied that they had been instructed to complete the sales of plots 3 and 4. Completion followed a few days later.
In fact, H’s charge was a sham and the sale of plots 3 and 4 involved a mortgage fraud which resulted in the company obtaining all the proceeds of sale of large parts of the mortgaged property. The bank succeeded in a claim against the appellant for damages for dishonest assistance in a breach of trust. The judge found that, after the sale of plot 2, M and D had become aware of the bank’s charge and knew that the completion of the sales of plots 3 and 4 would defeat the bank’s legitimate interests. He found that, with the knowledge that they had, their decision to continue to participate was contrary to normally acceptable standards of honest conduct: see [2013] EWHC B38 (Ch). The appellant appealed.
Held: The appeal was allowed.
The judge had erred in making a finding of dishonesty against M and D. The critical element of his reasoning was that the contemplated sales of plots 3 and 4 defeated the legitimate interests of the bank and that M and D knew that to be the case. However, in reaching that conclusion, the judge had not sufficiently analysed what were the “legitimate interests” of the bank. H was, on the face of things, the proprietor of a registered charge which took priority over the bank’s charge and would retain its priority even if the bank subsequently registered that charge. The bank was therefore in the position of a second charge and its legitimate interests extended only to whatever remained of the sale proceeds once H had been paid off to the extent of his security. The bank only had an equitable interest in the proceeds of sale of any of the plots to the extent, if any, that those proceeds exceeded the amount secured by H’s charge.
The critical question was therefore not what M and D knew about the bank’s charge, but what they knew or believed about H’s charge. The judge had made no explicit finding in that regard. He had not found as a fact that M and D knew either that H’s charge was a sham or that it secured less than the proceeds of sale. Nor had he found that they had refrained from asking how much the charge secured for fear of what they might learn in that respect, or that they did not care whether or not H’s charge secured more than the proceeds of sale, which might have been reckless and a sign of dishonesty.
If M and D believed that H’s registered charge secured an amount greater than the aggregate of the sale price of the plots, then, as between H and the bank, H would have been entitled to the sale proceeds. In that event, even though M and D had notice of the bank’s charge, they would still have been entitled, and indeed obliged, to pay over the sale proceeds to H’s solicitors. The same would have applied even if the bank had registered its charge shortly before completion. There would have been no breach of trust because H’s legal rights would have trumped whatever rights in equity the bank had, and would have taken priority over whatever rights at law the bank had. In giving effect to those legal rights, M and D would not have been acting dishonestly but, on the contrary, would have been acting in accordance with the law. M and D had both given evidence that that was their belief.
The judge had no grounds for rejecting that evidence. His analysis lacked any consideration of why M and D had acted as they did, which was necessary to a consideration of whether they acted dishonestly. While he was not bound to accept M and D’s evidence that they believed that H’s charge secured more than the proceeds of sale, he should have confronted that defence head on. Unless he was able to conclude that he did not believe it, which he did not say, then he was not entitled to find that they were guilty of dishonesty. A finding of dishonesty, especially against a solicitor, should not be made without careful consideration of what the solicitor said in his own defence. In the instant case, the judge had simply failed to deal with what was, at least potentially, a good defence.
Michael Pooles QC and Jamie Smith QC (instructed by Berrymans Lace Mawer LLP, of Manchester) appeared for the appellant; Roger Stewart QC and Scott Allen (instructed by Beale & Co Solicitors LLP) appeared for the respondent.
Sally Dobson, barrister
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