Credit & Mercantile plc v Kaymuu Ltd

Legal charge – Constructive trust – Overriding interest – Claimant holding charge over property previously occupied by second defendant – Claimant seeking to enforce charge and retain net proceeds of sale of property – Second defendant claiming beneficial owner of property under agreement with first defendant legal owner – Whether constructive trust arising on facts – Whether beneficial ownership overriding legal charge – Whether claimant entitled to legal costs from surplus – Whether third defendant trustee in bankruptcy entitled to reasonable remuneration, costs and expenses from surplus – Claim allowed in part The claimant held a charge over a residential property in Kent formerly occupied by the second defendant. The charge had been created in 2010 to secure moneys borrowed from the claimant by the first defendant company, which was the legal owner of the property. The first defendant was controlled by S, a bankrupt businessman believed to be living abroad. The third defendant was S’s trustee in bankruptcy. The property was sold in 2012 for £1.1m. The claimant sought to retain a little over £694,000 from the net proceeds of sale to realise its security. However, the second defendant laid claim to that amount on the basis that his beneficial ownership of the property overrode the claimant The second defendant contended that he and S had undertaken various property development projects together and that it had been agreed that each of the relevant business partners would take from the profits generated by the sale of interests in a project, with the second defendant’s share to be used to purchase the property for him and his partner. The second defendant argued that he had been unaware of the loan, that the property had been bought with his own money and that the arrangement was a clear case of a common intention constructive trust. The second and third defendants claimed the surplus from the sale. The claimant claimed its legal costs from the surplus, which had been paid into court to await the outcome of the proceedings. The third defendant trustee also claimed reasonable remuneration, costs and expenses from the surplus. Held: The claim was allowed in part. (1) In order to establish a beneficial interest, there had to be a pre-acquisition arrangement or understanding between the acquiring party and the non-acquiring party about the manner in which interests would be held in a property to be acquired. It was unnecessary that the arrangement or understanding should be contractually enforceable but it had to contemplate that the acquiring party would take steps to acquire the relevant property with the non-acquiring party obtaining some interest in the property. Further, the non-acquiring party, in reliance on the arrangement, had to do or omit to do something which conferred an advantage on the acquiring party in relation to the acquisition of the property. There need not be both an advantage to the acquiring party and a disadvantage or detriment to the non-acquiring party. In the present case, the beneficial ownership of the property had been vested in the second defendant on completion of the purchase. He was, therefore, entitled to the surplus, subject to the competing claims against it: Pallant v Morgan [1953] 1 Ch 43, Banner Homes Group plc v Luff Developments Ltd [2000] PLSCS 16; [2000] Ch 372, Thompson v Foy [2009] 22 EG 119 (CS); [2010] 1 P&CR 16 and Crossco No 4 Unlimited v Jolan Ltd [2012] PLSCS 1; [2012] P&CR 335 applied. (2) The instant case was governed by the principle in Rimmer v Webster [1902] 2 Ch 163 that, where an owner of property gave all the indicia of title to another person intending that he should deal with the property, the principles of agency applied and that any limit which he had imposed on his agent could not be enforced against an innocent purchaser or mortgagee from the agent, who had no notice of the limit. The second defendant’s abstinence from any involvement in the mechanics of the purchase of the property meant that he had authorised S to represent himself as beneficial owner, with full authority to deal with third parties as such. Accordingly, the second defendant could not assert his beneficial ownership of the property in priority to the claimant’s charge. It had been incumbent on the second defendant to bring his interest to the attention of the mortgagee, if he wished to establish the priority of his beneficial interest to the claimant. It followed that the claimant was entitled to retain the sum that it claimed as the amount, including interest, required to discharge the debt owed to it by the first defendant: Rimmer applied; Skipton Building Society v Clayton [1993] EGCS 60; (1993) 66 P&CR 223 distinguished; Paddington Building Society v Mendelsohn (1985) 50 P&CR 244 and Bank of Scotland v Hussain [2010] EWHC 2812 (Ch); [2010] PLSCS 287 considered. (3) The terms of the mortgage deed did not assist the claimant as against the second defendant and it was not entitled to recover from the surplus its costs of defending the second defendant’s claims. The mortgagee’s right to costs, being one which, like the duty of care, arose out of the particular relationship between him and the mortgagor, existed only where the proceedings were between the mortgagee and the mortgagor of his surety. However, the claimant was, in the ordinary way, entitled to recover its initial costs of the proceedings against the first defendant to obtain possession of the property since those costs had been incurred in the ordinary course of enforcing the mortgage contract and realising its security: Parker-Tweedale v Dunbar Bank plc (No 2) [1990] EGCS 19; [1991] Ch 26 applied. (4) The court had an inherent jurisdiction to require persons beneficially interested in property to subject their beneficial entitlements to a right of payment to persons who had come otherwise than by officious intermeddling into the position of fiduciaries in relation to the relevant fund, and had incurred time and cost in realising the fund and identifying the entitlements of the beneficiaries and paying out to those beneficiaries their entitlements. However, the discretion would not normally be exercised in favour of a person pursuing or investigating whether to pursue, an interest adverse to that of the beneficiary, where the person seeking the allowance maintained that the beneficiary was not entitled to the property from which the allowance was sought. The present case was not one in which the court should exercise its discretion to grant an allowance just because of the third defendant trustee’s decision to enter the arena and take sides in the argument. The circumstances were not so exceptional that an allowance should be granted: Berkeley Applegate (Investment Consultants) Ltd, Re [1989] 1 Ch 32, Green v Bramston [2010] EWHC 3106 (Ch); [2010] PLSCS 314 and Re Sports Betting Media Ltd [2007] EWHC (Ch); [2008] BCC 177 applied. Timothy Polli (instructed by Glovers Solicitors LLP) appeared for the claimant; Neil Mendoza (instructed by Haynes Orme Solicitors) appeared for the second defendant; Hugo Groves (instructed by Boyes Turner LLP) appeared for the third defendant.   Eileen O’Grady, barrister