Married couple mortgaging home and investing loan moneys in their own mortgage lending business – Soundness of investment fraudulently misrepresented by agent for plaintiff lender – Whether misrepresentation attributable to plaintiff – Whether lender fixed with notice of facts known to agent pertaining to undue influence
Castlegate Securities Ltd (Castlegate), owned and operated by W, arranged mortgage loans using funds obtained from companies largely owned by private investors. One such company, Cobvale Ltd (Cobvale), was owned by the defendants, Mr and Mrs Scott, who had made various investments with Castlegate since 1973. The daily business of Cobvale was conducted by W, whom the defendants trusted completely. W was at all times aware that Mrs Scott, though shown as a director of Cobvale with a 19% shareholding, took no active part in the business and obligingly signed documents as and when requested by her husband. During 1987 and 1988 W had inconclusive discussions with a business acquaintance, A, about finding further investors.
In early 1989 A joined the National Home Loans Group (NHL) who, acting on A’s suggestion, arranged for a wholly owned subsidiary (CLC) to conclude an “Operating and Agency Agreement” with Castlegate, whereby funds to be provided by CLC would be invested in mortgage transactions to be proposed and administered by Castlegate, the role of CLC being largely supervisory. A was appointed managing director both of CLC and of the plaintiff company (Nightingale), a subsidiary of CLC serving as a vehicle for the contemplated transactions. At or about this time W began to arrange “multi borrower” loans which, unknown to persons outside Castlegate, were extremely hazardous, and in some cases fraudulent. Falsely representing the soundness and profitability of such loans, W persuaded Mr Scott to mortgage the jointly owned family home to Nightingale in order to raise £450,000 to be applied via Cobvale to loan business of this nature. In 1991 Castlegate collapsed with heavy liabilities. In 1994 W was sentenced to five years imprisonment for fraudulent trading. In Nightingale’s proceedings for possession both defendants sought to rescind for fraudulent misrepresentation and for knowing assistance by Nightingale in W’s breach of trust. Mrs Scott raised a separate defence of undue influence. It was found as a fact that, although A had been careless in his supervisory role, he had not acted dishonestly.
Held Judgment was given against Mr Scott only.
1. Nightingale was not privy to the fraudulent misrepresentations made by W since Nightingale had no concern with the use subsequently made of moneys advanced.
2. Since the breach of trust by W had also related to such use, the lending of the £450,000 by Nightingale did not amount to knowing assistance; on the authorities active participation was required: see Barnes v Addy (1874) 9 Ch App 244; Royal Brunei Airlines Sdn Bhd v Tan (Philip Kok Ming) [1995] 2 AC 378.
3. Given the interest of Mrs Scott in Cobvale, Nightingale would normally have been entitled to assume that the loan was for her benefit, thus precluding any constructive notice of undue influence: see generally Barclays Bank v O’Brien [1994] 1 AC 180. However, that did not apply in the present case. W’s actual knowledge of her total reliance on Mr Scott had to be imputed to Nightingale as W was the directing mind of Nightingale for the purpose of setting up the loan.
Christopher Parker (instructed by Blatchfords) appeared for the plaintiff; Jonathan Marks QC and Kirsten Houghton (instructed by McBride Wilson & Co) appeared for the first defendant; Nicholas Yell (instructed by Jenkin Evans, of Reading) appeared for the second defendant.
