Equitable mistake – All-moneys charge – Deed of release – Company in administration – Respondent bank releasing charge over property in erroneous belief that all secured indebtedness discharged – Applicant administrator wanting to sell property – Whether respondent to be treated as secured or unsecured creditor – Whether entitled to rescind deed of release for mistake – Judgment for respondent
The respondent bank held an all-moneys charge over a property to secure the liabilities of its owner, a company of which the appellant had been appointed administrator in 2003. The company was liable to the respondent for its own indebtedness and, contingently, as the guarantor of the debts of a connected company. After the guarantees debts were discharged in late 2003, the respondent cancelled the guarantees and executed a deed of release in respect of the charge over the property. The deed was executed in the erroneous belief that nothing remained due to the respondent; the employees of the respondent responsible were unaware that the company was indebted to the respondent on its own account and that a substantial liability remained.
The applicant wanted to sell the property concerned. After he learnt of the execution of the deed, he applied to the court for directions as to whether he should treat the respondent as a secured or an unsecured creditor. The respondent contended for the former, arguing that the deed of release should be rescinded on the ground of mistake. It relied upon its erroneous belief that all the secured indebtedness had been discharged and argued that it had not intended to turn itself from a secured into an unsecured creditor. The applicant contended that: (i) no relevant mistake had been made since the respondent had intended to release the property from the charge; (ii) that was what the deed of release had achieved; and (iii) there had been no mistake as to the effect of the transaction. The respondent submitted that the court’s power to relieve from the consequences of a mistake was not so limited, and that the approach should be the same as that for the recovery of moneys paid under a mistake; relief was now available regardless of whether the mistake was one of fact or law provided that the mistake had caused the payment.
Held: Judgment was given for the respondent.
There was no general principle that, so long as the legal effect of the document was correctly understood, the court had no power to relieve a party from the consequences of a mistake: Lady Hood of Avalon v MacKinnon [1909] 1 Ch 476 and Gibbon v Mitchell [1990] 1 WLR 1304 considered. In any event, a mistake had been made as to the effect of the transaction. The respondent had considered itself bound to release the charge upon the discharge of all the secured indebtedness, whereas it was releasing its rights as secured creditor in respect of the company’s outstanding indebtedness. Turning the respondent from a secured into an unsecured creditor was an unintended effect.
The correct approach to mistake was that relief would be available where it could be shown that the party affected by the mistake would not have acted as it had done had it been aware of the true facts: Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 and Ogden v Trustees of the RHS Griffiths 2003 Settlement [2008] EWHC 118 (Ch); [2008] 2 All ER 655 applied; Allnutt v Wilding [2007] EWCA Civ 412; [2007] WTLR 941 distinguished. It was not strictly necessary to consider the distinction between “effect” and “consequences”. It followed that the applicant should recognise the respondent as a secured creditor as though the deed of release had never been executed.
Shakil Najib (instructed by Lewis Onions, of Birmingham) appeared for the applicant; Lloyd Tamlyn (instructed by Eversheds LLP, of Birmingham) appeared for the respondent.
Sally Dobson, barrister
