Security Impairment

Cases

Barclays Bank v O’Brien 

Appeal dismissed.

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Anfield (UK) Ltd v Bank of Scotland Plc & Ors

[2010] EWHC 2374 [2010] EWHC 2374 (Ch), [2010] 48 EG 86, [2010] NPC 96, [2011] 1 WLR 2414, [2010] 3 EGLR 75, [2011] 1 All ER 708, [2011] 1 All ER (Comm) 929, [2010] 41 EG 126 (CS)

The law

Proudman J

A lender who has made advances which have been used to discharge a secured debt owed to another lender may be entitled to step into the shoes of the other lender as far as the security is concerned, thereby gaining priority over intermediate lenders also holding security over the same property.

It is plain from the authorities cited and authoritatively analysed in Appleyard (and particularly the decision of the House of Lords in Banque Financière de la Cité v. Parc (Battersea) Limited [1999] 1 AC 221) that the principle underlying such subrogation is equitable in origin and is now recognised as primarily aimed at preventing unjust enrichment.

Intermediate lenders are necessarily enriched by the discharge of a prior security. However, in order for the principle to be engaged it is necessary to identify some unconscionable or unjust factor. As May LJ (with whom the other members of the Court of Appeal agreed) said in Filby v. Mortgage Express (No 2) Limited [2004] EWCA (Civ) 759 at [62],

“…the remedy of equitable subrogation is a restitutionary remedy available to reverse what would otherwise be unjust enrichment of a defendant at the expense of the claimant. The defendant is enriched if his financial position is materially improved, usually as here where the defendant is relieved of a financial burden…The enrichment will be at the expense of the claimant if in reality it was the claimant’s money which effected the improvement. Subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment will be unjust if the claimant did not get the security he bargained for when he advanced the money which in reality effected the improvement, and if the defendant’s financial improvement is properly seen as a windfall. The remedy does not extend to giving the claimant more than he bargained for. The remedy is not limited to cases where either or both the claimant and defendant intended that the money advanced should be used to effect the improvement. It is sufficient that it was in fact in reality so used. The remedy is flexible and adaptable to produce a just result. Within this framework, the remedy is discretionary in the sense that at each stage it is a matter of judgment whether on the facts the necessary elements are fulfilled.”

In Appleyard the Court of Appeal set out 13 established principles distilled from the authorities. Of particular relevance to the present case are 7, 8 and 11, as follows:

“Seventhly, a lender cannot claim subrogation if he obtains all the security which he bargained for, as in Burston Finance (applying Capital Finance Co Limited v. Stokes [1969] 1 Ch 261) or where he has specifically bargained on the basis that he would receive no such security as in Paul v. Speirway Limited (in liquidation) [1976] 1 WLR 220.

Eighthly, the fact that the lender’s failure to obtain the security he bargained for was attributable to his negligence is irrelevant. It does not prevent him from claiming subrogation- see per Lord Hoffmann at 235G in Banque Financière. The effect of that observation was probably impliedly to disapprove observations of Walton J in Burston Finance at 1657C and F. However, Walton J was concerned with a case where the lender obtained the security, but negligently failed to protect himself by registering it, whereas in Banque Financière the lender’s negligence was in failing to check that he had obtained the security…

Eleventhly, it is difficult, and may be impossible, for a lender who has obtained security to invoke subrogation where the security he has obtained gives him all the rights and remedies of security to which he claims to be subrogated (see Burston Finance at 1653 D-E), or is a security on which the original security would naturally merge (see Burston Finance at 1653C and per Lord Diplock in Orakpo [v. Manson Investments Limited [1978] AC 95] at 105B-C.”

The central issue in the present appeal is whether the enrichment of intermediate secured lenders (that is to say, Anfield and LSFL) is unjust in circumstances where the lender claiming subrogation (the Bank) expects to receive a first legal charge over the property but does not do so solely because of its failure to register the charge under the Land Registration Act 2002.

Mr Lander submitted that the lender has all it bargained for in the matter of a charge, since registration was a matter solely for the lender, not for the borrower. In those circumstances he submitted that the fact that the failure to register may have been negligent is irrelevant.

Two potentially conflicting views appear from the authorities as to the effect of non-registration. In Burston Finance, Walton J remarked that a lender who fails to obtain his desired security by reason of non-registration under the Land Registration Acts is not entitled to subrogation because he has obtained everything he bargained for, namely a charge in registrable form.

By contrast, in Appleyard, the Court of Appeal took the view that a lender who stipulates for a legal charge but who in fact obtains only an equitable charge because he fails to register under the Land Registration Acts does not obtain all that he bargained for. He bargained for a legal charge. Accordingly, subject to fulfilment of all other relevant requirements, he will be entitled to be subrogated to an earlier legal charge that was discharged with his advance.

The facts of both cases are distinguishable from those of the present case, but in both cases the Court comments on the very situation which has now arisen.

Burston

In Burston, the chargee seeking subrogation had registered the charge at the Land Registry but had failed to register it under s. 95 of the Companies Act 1948 with the effect that the charge was void as against the liquidator. The principal ground of Walton J’s decision was that the plaintiff could not rely on their unpaid vendor’s lien as it had been replaced by and merged with the legal charge. (As to which see further Orakpo at 105 B-C.) In any event, relying on Capital Finance v. Stokes [1969] 1 Ch 261, Walton J decided that in the case of non-registration as a company charge the charge was effective when made and therefore the chargee obtained all that he bargained for. The Judge was bound by the decision in that case to reject the argument that what was bargained for was “a valid legal charge”. He said (at 1657 A),

“What the Court of Appeal there decided, it appears to me, was that it was quite impossible to equate a legal charge which only becomes void subsequently to its creation, and then only to a strictly limited extent, with the kind of charges in Thurstan v. Nottingham Permanent Benefit Building Society [1902] 1 Ch 1 and Congresbury Motors Ltd v. Anglo-Belge Finance Co Ltd [1971] Ch 81 which, for one reason or another, were wholly ineffective from their creation. See also in re Monolithic Building Co [1915] 1 Ch 643 per Lord Cozens-Hardy MR, at p.667 and Phillimore LJ at pp. 667, 668.”

On the one hand, therefore, there were cases where a charge was invalid from its creation, as in Thurstan where the loan was made to an infant without capacity, Re Cork and Youghall Railway Co (1860) LR 4 Ch App 748 where the borrowing was ultra vires, Eagle Star Insurance Co v. Karasiewicz [2002] EWCA Civ 940 where the security did not bind a wife’s beneficial interest, Filby where the charge was tainted by forgery, or Banque Financière where the party purporting to grant a postponement had no authority to do so. On the other side there are the cases where the charge became invalid subsequently and to a limited extent because of non-registration under the Companies Acts.

In considering what the parties bargained for, it could be argued, and was argued in Burston, that in the case of a company charge the primary duty as to registration was on the borrower and thus that one of the matters bargained for was that the charge would be registered. That is not the case where the non-registration is under the Land Registration Acts. In both cases, however, the charge is not void from its inception. By contrast, in cases of non-registration, the lender’s assumption as to validity only becomes false once the period for registration has elapsed because until that time it is within the chargee’s power to obtain the security bargained for. Accordingly, Walton J went on to say (at 1657 B),

“Mr Price urged strongly that if the correct test was indeed… did the vendor obtain all that he bargained for?, then here he did not obtain it, because one of the things for which he bargained was that the defendants would fulfil their statutory duty of registration pursuant to section 96 of the Act of 1948. But this is to confuse substance with formalities. As regards the formality of registration under section 26 of the Land Registration Act 1925, nothing can at the end of the day turn upon this because it was duly effected. But even if it had not been, this is a matter wholly within the plaintiffs’ own power, and therefore it could not be suggested that failure to register could have any conceivable effect on the plaintiffs obtaining “all that they bargained for.” As regards registration under s, 95, once again, this is undeniably, as pointed out by Harman LJ, within the plaintiffs’ own power, although the primary duty was cast on the defendants. Nevertheless, even without such registration, the charge remained effective against the defendants- and still so remains…

So all this demonstrates, to my mind, that there is no doubt that the plaintiffs got what they bargained for. They were merely lax in not taking steps to ensure that what they bargained for remained good against the world.” [Emphasis added].

Appleyard

In Appleyard there was no failure to register in the sense considered by Walton J in Burston. The reason that the claimant did not obtain the legal charge for which it stipulated was that an earlier incumbrancer, whose debt had been discharged with the claimant’s advance, failed for reasons connected with its insolvency to consent to the registration of the claimant’s charge. It was not within the power of the lender to obtain all it bargained for.

In Appleyard, the appellants sought to rely on Walton J’s dicta to say that the lender had obtained all that it bargained for in that there was a valid and enforceable charge as between lender and borrowers. The Court of Appeal decided that the lender did not obtain all that it bargained for; it bargained for a legal charge, whereas non-registration under the Land Registration Acts gave it only an equitable charge with inferior remedies. The Court treated Burston and indeed Capital Finance as having been correctly decided on their facts, but expressed severe doubts (see below) about the correctness of Walton J’s comments on the effect of non-registration under the Land Registration Acts. Neuberger LJ said (at [71]),

“…C&G did not obtain the security they bargained for. In the two earlier cases, the failure to register the charge under s.95 did not affect the character of the charge obtained by the plaintiff in each case. Non registration under s.95 did not prevent the charge in either case being a legal charge. It merely rendered it ‘void’ as against a subsequent creditor or liquidator. On the other hand, non-registration of the C&G mortgage at the Land Registry prevented it from being a legal charge: it was merely an equitable charge. Yet it was a legal charge for which the parties bargained. “

Neuberger LJ went on to cite passages from Capital Finance and from Boscawen v. Bajwa [1996] 1 WLR 328 at 339 in support of this analysis.

Further, Neuberger LJ observed that in both Burston and Capital Finance, the Court appears to have been influenced in refusing the remedy of subrogation by the fact that the lender was negligent in failing to register his security. It is now settled after the decision of the House of Lords in Banque Financière that negligence or carelessness on the part of the lender is not a factor to be taken into account when considering the claim for subrogation, “at least where the negligence relates to the obtaining of the security”.

Am I bound by Appleyard on the facts of this case?

The first question for me is whether I am bound by the decision in Appleyard on the facts of the present case. Although the rationale of the case would seem to apply to the present facts also, it seems that I am not strictly bound because the Court of Appeal expressly left the current issue open. Neuberger LJ said (at [75]),

“It may be (although we doubt it) that the lender’s negligent failure to protect or perfect the security should be treated differently.”

However, in the passage quoted above, the Court has expressed the considered view that Walton J’s dictum about the effect of non-registration under the Land Registration Acts was wrong. The view of the Court of Appeal must carry the strongest possible persuasive effect and very good reason would have to be shown for departing from it.

The judgment in Appleyard contains two other very specific criticisms of the dictum. First, at [39], Neuberger LJ states the Court’s view that the effect of Lord Hoffmann’s observation at 235E-G in Banque Financière as to the irrelevance of the lender’s negligence “was probably impliedly to disapprove observations of Walton J in Burston Finance at 1657C and F”. Secondly, he said at [71],

“The fact that the effect of non-registration under the Land Registration act 1925 of the charge would prevent it from being a legal charge may have been overlooked by Walton J in Burston Finance at 1657C. If so, it is not particularly surprising, given that it was an extempore judgment and his observations on this aspect were purely obiter.”

Nevertheless, Mr Lander asks me to prefer the obiter reasoning of Walton J in Burston as to subsequent failure to perfect the lender’s security to the obiter view expressed by the Court of Appeal in Appleyard.

Negligence

I see the force of Mr Lander’s submission that negligence is irrelevant at the stage of perfecting a security if by that stage the lender can be said to have got all he bargained for. In Appleyard Neuberger LJ refers to earlier courts being “influenced” by the negligence of the lender. He does not say negligence was the actual ground for denying subrogation.

However Neuberger LJ does rely on Walton J’s reference to what he described as the plaintiffs’ “lax” conduct. It does indeed appear to be Walton J’s view that there is nothing unconscionable in a lender bearing the burden of his own mistake in circumstances where neither the borrower nor the defendant knew of the mistake or had any involvement in it. Such a view cannot survive the statement in Banque Financière that the lender’s carelessness in obtaining the desired security does not, by itself, defeat a claim for subrogation. I accept Miss Eborall’s submission that to try and draw distinctions between carelessness at different stages of the process is perilously close to fashioning an exception to a principle which was expressed in general terms. The court is required, as the Judge below found (see [77]) simply to look at the question of the justice of the enrichment of the defendant. You do not lose your right to resist an unjust enrichment gained at your expense simply because you have been careless in relation to the security.

Of course there may potentially be harm to third party lenders who can demonstrate reliance on the register. Mr Lander suggested that this is a basis for distinguishing between non-registration and other kinds of negligence or failures. However I agree with the Judge below [at 88] that the law is flexible enough to recognise that detriment to third parties might form a basis for withholding the remedy of subrogation on the basis that in such circumstances the enrichment of the defendant had not been unjust. I have in mind the kind of change of position defence available to a party who has acted in the reasonable, but false, belief that a particular state of affairs existed.

The Banque Financière approach

In my judgment, whether or not I am technically bound to apply it, the analysis in Appleyard is to be preferred to that in Burston on the basis of the approach taken in Banque Financière. First, the focus has shifted from facts affecting the conscience of the mortgagor to the justice of the position as between the lender and the party enriched. Secondly, it is clear that the availability of subrogation does not turn entirely on the existence of an unfulfilled mutual intention or agreement between the party seeking subrogation and the enriched party: see 227F per Lord Steyn, 231E-234G per Lord Hoffmann with whom Lords Griffiths and Clyde agreed. Thirdly, prominence is given to the intention of the lender.

Applying these principles, the House of Lords held that the enrichment that would occur in the absence of subrogation would be unjust, because the claimant had advanced funds on the mistaken assumption that it would obtain a postponement of the borrower’s intra-group debts. This assumption was causative of the claimant’s decision to advance money to the borrower.

Thus the factor that renders the enrichment unjust is the non-fulfilment of the lender’s expectation as to the security, forming the basis of its decision to advance funds. This is to be contrasted with the Burston approach which requires an inquiry, akin to the process of contractual construction, into the question whether the precise terms of the bargain between the lender and borrower have been fulfilled.

I agree with the Judge below that in considering the question whether the lender got what it bargained for, the bargain is to be interpreted in what she called [65]-[67] and [72] “the wider sense of ‘the envisaged transaction'”, analysing Lord Hoffmann’s words “an essential part of the transaction under which it paid the money” in Banque Financière at 235A.

The enrichment of the claimant is unjust because the Bank funded the repayment of the Halifax Charge on the basis that it would obtain a legal charge. Because of the failure to register under the Land Registration Act 2002 it obtained only a subsequent equitable charge. It does not matter that the borrower has performed the terms of the bargain between the borrower and the lender.

An argument could be advanced to the effect that the lender advances money on the faith only of a promise to supply a registrable charge, or, as Mr Lander put it, to supply documentation capable of being rendered a legal charge by the act of the lender himself. However that argument potentially falls foul of Lord Hoffmann’s warning (in Banque Financière at 232A) against importing contractual requirements into the principles governing non-contractual forms of subrogation. The emphasis is, as the Judge below said, (at [64]) on the overall position and the practical aspects of the enrichment of the party opposing subrogation.

Subverting the policy of the Land Registration Acts?

Finally, I will deal briefly with Mr Lander’s submission that to allow subrogation would be to subvert the policy of the 2002 Act. What this submission boiled down to was that the Act forms some sort of conclusive code, enabling those who lend to rely on the position on the face of the register. If that was correct, it would be difficult to claim subrogation in any case of registered land. It would moreover be difficult to reconcile with the clear view of the Court of Appeal as expressed in Appleyard. In my judgment the policy of the Act does not encroach on the principle of unjust enrichment. I agree with the Judge below (for the reasons she gave at [85]-[88]) that any unfair consequences of subrogation can be dealt with by way of a defence founded on change of position.

This is quite different from the cases about moneylenders where subrogation was denied on public policy grounds: see Orakpo, overruling Congresbury Motors.

Decision

I therefore find that the appeal fails. In my judgment Her Honour Judge Marshall QC came to the right decision, that the Bank is entitled to be subrogated to the Halifax Charge, for the reasons which she gave.

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Allied Irish Banks v. Glynn

[1973] IR 188

Kenny J.              

 On the 3rd November, 1960, the first defendant was registered as full owner of the lands comprised in Folio 33488 of the register of freeholders for County Roscommon. On the 9th April, 1963, he transferred the lands to his son Michael, the second defendant, subject to his right to reside in the dwellinghouse on the lands and to be suitably supported and maintained there; but there was no covenant in connection with this. On the 17th June, 1963, the second defendant was registered as full owner and the right of the first defendant to reside in the dwellinghouse and to be supported and maintained was entered as a burden on the folio.

 In October, 1964, the second defendant applied to the plaintiffs for an advance to be secured by a deposit of the land certificate relating to the folio. The land certificate was issued by the Land Registry to the second defendant’s solicitor on the 19th November, 1964. On the 5th December, 1964, the second defendant deposited the land certificate with the plaintiffs as security for advances to be made to him; he now owes £893 for principal to the plaintiffs.

 In June, 1967, the first defendant issued a civil bill in the Circuit Court against the second defendant claiming to have the deed of transfer of the 9th April, 1963, set aside because when the first defendant signed it he was entirely under the influence of the second defendant and had no independent advice, and because it was obtained by fraud and undue influence. The order made by the Circuit Court on the 6th March, 1968, recited that the second defendant’s solicitor had entered an appearance and defence in that action but that he had not received any instructions

for the hearing; and the order declared that the transfer deed was void, that the second defendant was to hand it up to the first defendant for the purpose of being cancelled (though it is not easy to understand how he could do this when it had been lodged in the Land Registry) and “that the land registry (sic) be rectified by deletion of the registration of the defendant as full owner on the said Folio 33488 of the Register of County Roscommon and the entry of the plaintiff as full owner thereof on the said Register.” No enquiry seems to have been made by the Circuit Court about the custody of the land certificate although the folio showed that it had been issued, and the plaintiffs in this action had no notice of the proceedings in the Circuit Court and did not know anything about them until the Land Registry requested them to lodge the land certificate so that the first defendant could be registered as owner. The plaintiffs refused to do this but, despite this, the first defendant was registered as full owner on the 3rd July, 1968, and the burden in his favour was deleted. I think that a court should not order that a folio in the Land Registry should be rectified by deleting the name of one person as full owner and substituting someone else without requiring the land certificate to be produced when the folio shows that it has been issued. Such an order offends against elementary principle.

 The plaintiffs have now sued the defendants for a declaration that they are entitled to a charge on the lands arising out of the deposit of the land certificate with them, and for a sale of the lands. At the time when the deposit was made, the Registration of Title (Ireland) Act, 1891, was in force and s. 81, sub-s. 5, of that Act provided13 that, subject to any registered rights, the deposit of a land certificate or certificate of charge should, for the purpose of creating a lien on the land or charge to which the certificate related, have the same effect as the deposit of the title deeds of land or of a charge thereon had theretofore: see now s. 105 of the Registration of Title Act, 1964.

 The deposit, as security, of documents of title to land which is not registered gives the person with whom it is made an equitable estate in the lands until the money secured by it is repaid: the remedy for securing payment is to apply to the court for a declaration that the deposit has given a charge on the lands. The right created by the deposit is not limited to keeping the deeds until the money has been paid but gives an equitable estate in the lands. The plaintiffs’ contention is that they took the deposit without notice of the first defendant’s claim and that, although they got an equitable interest only, it ranks before the first defendant’s equity. The terms “equity”and “equitable estate” and “equitable interest” have been used in different senses in Acts of Parliament, in decided cases and in text books; the difference between them is not capable of complete definition. The main difference is, I think, that “an equity” does not create or give any estate in the land: it is a right against persons and is enforceable against those who were parties to the transaction which created it.

 In  National Provincial Bank Ltd. v. Ainsworth 14 Lord Upjohn emphasised that “an equity” does not create an estate or right in land. At pp. 1237-8 of the report he said:” “So in principle, in my opinion, to create a right over the land of another that right must in contemplation of law be such that it creates a legal or equitable estate or interest in that land and notice of something though relating to land which falls short of an estate or interest is insufficient. There are no doubt many cases where judges have said the purchaser ‘takes subject to all equities’ but they meant ‘equitable interests’ . . . An equity to which a subsequent purchaser is subject must create an interest in the land.”

 When Parliament provided in s. 29, sub-s. 3, of the Act of 1891 that registration of a person as owner could be made subject to any rights or equities arising from the interest vested in him being deemed to be a graft upon his previous interest in the land, it meant that estates or interests existing at the time of registration were enforceable against the registered owner. The rights saved by the note as to equities in the Act of 1891 were equitable estates or interests and not equities. Parliament, like judges, sometimes uses imprecise language.

 But what was the first defendant’s interest in the lands when the deposit with the plaintiffs was made? It cannot  be classified accurately as having been “an equity” only for, if the deed was procured by fraud or undue influence, the first defendant would acquire an estate in the lands when he succeeded in setting it aside. What he had was a chose in action which could become an estate if he brought proceedings and if they were successful. Lord Upjohn was dealing with the equity of a deserted wife to retain possession against a mortgagee from her husband who gave the security after he had left her: her claim could never become an estate and so the passage I have quoted does not assist the plaintiffs.

 The plaintiffs’ main argument is that they took the deposit in good faith without notice of the first defendant’s claim and so have a valid security against both defendants; in my view that submission is correct. They had no notice of the facts giving rise to the claim to set the deed aside and there is persuasive authority that a purchaser or mortgagee of an equitable interest who takes in good faith without notice of a claim or the facts giving rise to it is not bound by it. Lord Westbury said in  Phillips v.Phillips 15 that this was the law and Mr. Justice Fry expressed the same view in  Bainbrigge v. Browne. 16

 The land certificate deposited with the plaintiffs showed them that the deed of 1963 was a transfer between father and son because of the similarity of the surnames and the addresses, and the burden entered was appropriate for such a transaction. But knowledge that the transfer was between father and son was not notice that it had been procured by fraud or undue influence and there was nothing to suggest that it would be set aside subsequently.

 The plaintiffs argued that, if their main contention failed, they were entitled to a charge on the lands against the first defendant, the registered owner, because their interest, though later in time, was superior in equity to his and so should be preferred. Mr. Matheson relied on the much-discussed decision of the Irish Court of Appeal ( In re Ffrench’s Estate 17) to support this but, as the plaintiffs succeed on their main contention, it is not necessary to deal with this difficult and controversial problem on which the

 Irish Court of Appeal have expressed one view and the House of Lords another.

 The next issue is whether the plaintiffs’ interest is subject to any claim of the first defendant to reside on the lands and to be supported and maintained there. When the plaintiffs took the deposit of the land certificate, they got notice that these rights existed. If the first defendant had not brought the proceedings in the Circuit Court, his rights under the deed of 1963 would rank before those of the plaintiffs. The plaintiffs submitted that the first defendant cannot approbate and reprobate and that, as he brought successful proceedings to have the deed of 1963 set aside, he cannot now invoke the rights which it created. As the deed has been declared void, the rights which it created do not now exist. They have been deleted from the folio and the first defendant cannot revive them as an answer to the plaintiffs’ claim. This has the unintended consequence that the plaintiffs’ security has been improved in value by what the first defendant did but this is the result of his action, not of theirs.

 Therefore, there will be a declaration that the sum secured by the equitable mortgage by deposit of the land certificate relating to the lands comprised in the folio is well charged on the interest of the first and second defendants in the lands

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Scott v. Scott

 [1924] IR 141

M. R.     (I. F. S.)

 It appears to me that as between two claimants, each having only an equitable interest, this is a clear authority that the first in point of time cannot be prejudiced by the fact that it was a breach of trust by his trustee which occasioned the dealing with the second in point of time.

 But, as I said, the law stands in a peculiar way. The judgments of the Court of Appeal in Ireland are directly at variance with the judgment of the House of Lords.

 In  In re Ffrench’s Estate (1), where there was a contest between cestuis que trustent, who asserted their prior equity against a subsequent equity which arose out of a breach of trust committed by the trustees, FitzGibbon L.J. said (2): “I think that where cestuis que trustent are represented by trustees, and are acting, or must claim, through trustees in whom the legal estate is or ought to be vested, and where innocent and independent third parties have been misled or defrauded by the conduct, or through the laches, of those trustees, such cestuis que trustent cannot be better off, in equity, than if they had been sui juris, and had themselves acted as their trustees did.”

 In the same case Barry L.J. said (3): “It is the duty of such persons to select careful and honest trustees, and if they fail in that duty, and select those who are careless or dishonest, and either the children or innocent strangers must be defrauded by the acts of such trustees, the loss should fall on those whose agents chose the faulty trustees rather than on the strangers, assuming, of course, the latter to be guilty of no negligence or default.”

 These statements of the law were reaffirmed by Porter M.R. in the  Bank of Ireland v. Cogry Flax Spinning Co. (4).

 I cannot reconcile these judgments with Lord Cairns’s judgment in the  Shropshire Union Railways and Canal Co. v.The Queen (5) because, there the equitable mortgage was made by the company’s trustee in breach of his trust and, notwithstanding that, it was held that the company, the cestui que trust, had priority. In other words, the loss fell on the stranger and not on the party who actually appointed the delinquent trustee.

 Cases of the same character with the same result were Moore v. North-Western Bank (1) and  Ireland v. Harte (2).In each of these cases the stranger was allowed to suffer by the fraudulent conduct of a trustee. It is strange that the Shropshire Union Case (3) was not referred to in either  In re Ffrench’s Estate (4) or in  Bank of Ireland v. Cogry Flax Spinning Co. (5). Mr. Meredith would possibly explain this by saying that equities against choses in action and equities against real estate must be dealt with quite apart, and that the same principles do not apply. I cannot accept this because the principles enunciated in both the English and Irish cases are broad equitable principles which must affect every class of property. It is obvious that in the conflict of authorities I must accept the law as laid down by the Irish Court of Appeal, although I have a suspicion that it conflicts with the fundamental principle that every equitable conveyance must be an innocent conveyance.

 It is, however, to be remarked that in  In re Ffrench’s Estate (4) the party Tyrrell, whose later equity was held to be the superior equity, had done everything he could have done to perfect his title; whereas in the present case the Provincial Bank could have, without any difficulty, acquired the legal ownership of the shares whose scrip was deposited. One of the elements in  In re Ffrench’s Estate (4) was that the claimants, who were prior in point of time, had not an equitable estate, but only what is called a mere equity, while the claimants, in respect of the later equity, had a definite equitable estatethat is, a mortgage upon an equity of redemption. Let us see how this bears upon the present case. It was the duty of the defendant, Ellen Scott, as soon as she had obtained a grant of administration to her husband, or at least within a reasonable time afterwards, to realize his assets. She had no right to continue to trade with them. She did continue to trade, and was, therefore, guilty of a continuing breach of trust. Now what were the rights in these circumstances of the next-of-kin? Any one of them could have commenced an action against her and could have made her liable for the full value of the assets which she had illegally dealt with, together with interest at the rate of 5 per cent. thereon, or, at his election, he could have adopted the trading and made her account for all her trade dealings. These were the alternative equities, either of which could have been asserted. The latter alternative has been adopted which, no doubt, means following the assets of the intestate into property which has come to represent them. But this is a mere equityit is not an equitable estate, which involves a definite lien, charge, or claim on a definite item of property. It is not like a vendor’s lien for unpaid purchase-money, or an equitable mortgage of specific property, or a claim by a cestui que trust arising out of a trust of specific property. It is rather a right of action, the assertion of which may result in the capture of property for a particular trust. It is well settled that in a contest of priorities such a claim cannot prevail against an equitable estate, such as the bank has in the present casethat is, an equitable mortgage on specific items of property. There is another element in this case which must be taken into account in weighing the equity of the next-of-kin against that of the bank. The overdraft of Thos. Scott & Co. on the bank account was brought about to a very great extent, if not entirely, by overdrafts which went in payment for the several securities which were pledged to the bank. I think that the securities in the main represent advances by the bank to Ellen Scott, and the proceeds of the sale of these securities will go in reduction of the overdraft and in relief of the estate. The overdraft must for the purposes of the plaintiffs’ claim be regarded as a liability of Thomas Scott, deceased. If it is to be regarded as the personal liability of Ellen Scott, the stocks and shares so far as purchased with advances are not assets at all, because they would then have been purchased by Ellen Scott by moneys borrowed on her own personal security. It is not necessary, however, to go particularly into this, because on the other ground mentioned I am of opinion that the title of the bank to the securities is good.

 I must now see what exactly should be the terms of the judgment. In the first place, there must be the usual order for administration, with the usual inquiries. Then there must be an inquiry into the trade dealings of the defendant, Ellen Scott, with the assets of the defendant. This will be a trading account. There will be no account against her under the heading of wilful defaultwilful default has not been alleged. True, the defendant has been charged with breach of trust in trading, but the trading has been adopted. There must also be a declaration that the defendant, James B. Scott, is bound to account for all moneys belonging to the business of Thos. Scott & Co. which he invested in the purchase of stocks and shares in his own name, and there must be an account taken of such moneys and of the loss occasioned to the business by such purchases as aforesaid. There must also be a declaration that his share, as one of the next-of-kin, is bound to indemnify the estate against all such losses.

 There will be a declaration that the Provincial Bank, by virtue of the deposit of the certificate of shares mentioned in the letter of deposit dated 6th May, 1920, became entitled to a good equitable mortgage on such shares and securities in respect of the balance due to the bank on foot of the account of Thomas Scott & Co. There will be a further declaration that the Provincial Bank, by virtue of the deposit of the certificate of shares mentioned in the letter of Robert Nicol to Hume Robertson, dated 7th December, 1920, became entitled to a good equitable mortgage on such shares and securities in respect of the balance due to the bank on foot of the account of James B. Scott; and a further declaration that all moneys due to the bank on such account are, as between the defendant, Ellen Scott, as administratrix of Thomas Scott, and the said James B. Scott primarily chargeable on the estate and interest of James B. Scott in the premises No. 28 Sandymount Avenue, Sandymount, the lease of which was deposited with the bank as further security for the balance due on the account of the said James B. Scott. There will be a further declaration that, subject to the said equitable mortgage, the several stocks and shares are assets of Thomas Scott, deceased.

 I can decide nothing at present about the incidence of the trade debts contracted by the defendant, Ellen Scott. Questions as to this must arise in the course of the action. No doubt the creditors will furnish their claims, and when they do further questions will arise. I will declare the bank entitled to their costs of this action up to and including this hearing with their demand, and that, in so far as the securities held by the bank are insufficient to meet the said demand, such costs are payable out of the assets of the deceased. I will order the defendant, James B. Scott, to pay the plaintiffs’ costs up to and including this hearing. I will reserve all other costs, and adjourn for further consideration.

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Bank of Ireland Finance v. Daly Ltd.

[1978] IR 79

McMahon J.       H.C.

The claim arises in the following manner. In September, 1969, the bank agreed to make a loan of £60,000 to the company to enable it to purchase 42 acres of land at Mountfieldstown in the county of Cork and it was agreed that, in consideration of the advance, the company’s solicitors would lodge the title deeds of the property with the bank on the completion of the transaction and that they would hold the title deeds in trust for the bank pending such completion. In implementation of the agreement the company’s solicitors (P. J. O’Driscoll and Son) wrote a letter dated the 10th October, 1969, to the bank in the following terms:

 “Re D. J. Daly Limited. Lands at Mountfieldstown. Further to our recent telephone conversation with you in accordance with our client’s instructions we hereby undertake that in consideration of an advance of £60,000 we will lodge the title deeds of the above property containing approximately 42 acres with you on the completion of this transaction and pending its completion we will hold the title documents in trust for you. We further undertake to lodge with you the amount of your advance on the completion of the re-sale of this property which we anticipate to be within six months.”

 The bank advanced the sum of £60,000 to the company by cheque dated the 10th October, 1969. The unpaid balance of the purchase money amounting to £54,000 was paid by the company out of the sum of £60,000 advanced by the bank.

 The vendors were the Borrowdale Property Co. Ltd. and they duly conveyed the lands to the companybut the title deeds were not lodged with the bank on the completion of the purchase. The title deeds subsequently came into the possession of the bank about the month of February, 1974, in circumstances which were the subject matter of oral evidence by the only two witnesses called in the action, namely, Mr. James Pile who is a bank official and Mr. Barry O’Driscoll, the solicitor for the company. The remaining facts in the case were admitted in an agreed statement of facts.

 The issue between the bank and the company arose because an equitable mortgage by deposit of title deeds created by the company would have been void for want of registration under s. 99 of the Companies Act, 1963.

 The company was in liquidation and the liquidator, on behalf of the creditors, contested the bank’s claim on two grounds:

 (1) Having stipulated in the contract for the loan to the company for security by way of an equitable charge, the bank was precluded from claiming to be subrogated to the vendor’s lien, and

 (2) If the bank was entitled to be subrogated to the vendor’s lien, that lien constituted a charge created by the company and was void for want of registration under s. 99 of the Companies Act, 1963.

 So far as concerns the matters which were in controversy on the oral evidence given in this action, it is sufficient to say that I am not satisfied that Mr. O’Driscoll gave the title deeds to Mr. Pile with the intention of depositing them as security for the advance. It is not sufficient that, after an agreement to give security, title deeds come into the hands of the creditor for another purpose: Ex parte Broderick.5

 The deposit of title deeds by a debtor is prima facie evidence of an agreement for a mortgage of the estate. The company submitted that the solicitor’s letter of the 10th October, 1969, was a written memorandum of an agreement by the company to lodge the title deeds with the bank on the completion of the sale so as to create an equitable mortgage, and that that agreement was sufficient in itself, without an actual deposit of the title deeds, to create an equitable charge on the principle that an agreement in writing, however informal, by which any property is to be security for a debt creates an equitable charge: Ex parte Crossfield.8  In my view this submission is correct and is supported by the decision in  Simmons v. Montague .10  In that case the debtor deposited the title deeds of his hotel with a map of the property, but he had a possessory title only to part of the hotel. The deposit was held to be sufficient evidence of an agreement to charge all his interest in the hotel, including that part held under a possessory title and in respect of which no deeds were deposited.

 In my opinion the bank was entitled to an unpaid vendor’s lien by subrogation up to the completion of the sale to the company and, thereafter, the bank was entitled to an equitable charge by virtue of the agreement evidenced by Mr. O’Driscoll’s letter of the 10th October, 1969.

 The company contends that the bank, having obtained that equitable charge, is precluded from claiming to be subrogated to an unpaid vendor’s lien after the completion. The authorities show that where the vendor has stipulated for and has obtained a legal charge on the property there is no vendor’s lien:  Capital Finance Co. Ltd. v. Stokes .11  Where a creditor has provided the purchase money he cannot claim to be subrogated to an unpaid vendor’s lien where he has stipulated for and obtained a legal charge:  Burston Finance Ltd. v. Speirway Ltd .12  In these cases the claim to an unpaid vendor’s lien, or to subrogation to such a lien, fails because the party who would otherwise be entitled to a debt presently due has taken a legal charge instead and has thereby obtained all that he is entitled to under the contract of sale or contract of loan.

 The question of subrogation was an issue considered in the recent decision of the House of Lords in  Orakpo v. Manson Investments Ltd .2  In that case money had been advanced by a moneylender for the purchase of specific properties and the loan was to be secured by a first legal charge on the property in favour of the lenders. The contracts for the repayment of the loans and the legal charges given as security were unenforceable under the Moneylenders Act, 1927. It was claimed that the moneylenders were entitled by subrogation to an unpaid vendor’s lien.

 At p. 235 of the report Lord Diplock said:”The mere fact that money lent has been expended upon discharging a secured liability of the borrower does not give rise to any implication of subrogation unless the contract under which the money was borrowed provides that the money is to be applied for this purpose:  Wylie v. Carlyon .13  Furthermore, even where the contract does so provide, the implication may be displaced by the presence in the contract of express terms which are inconsistent with the acquisition or retention by the lender of a right of subrogation. An express provision that the borrower shall create a legal charge upon the property in favour of the lender as security for the money lent does not necessarily displace the implication that pending the execution of the legal charge the lender is to be subrogated to any equitable security on the property in discharge of which his loan is to be applied. On the execution of the legal charge, however, the equitable charge-by-subrogation will merge in the higher ranking legal charge in favour of the same chargee.”

 At p. 241 of the report Lord Salmon said: “Moreover there could be no reasonable case for applying the equitable doctrine of subrogation since in each transaction the lender took a legal charge over the property concerned and any equitable charge by subrogation would merge in this higher ranking legal charge.” Lord Edmund-Davies also held (p. 245) that the vendor’s lien must be taken to have been abandoned when the charges by way of legal mortgages were duly executed and delivered to the lenders.

 In my opinion the bank’s claim to subrogation after completion of the sale depends on whether the express term of the contract of loan (that the title deeds were to be deposited with the bank on completion of the sale) is inconsistent with the retention of a right of subrogation by the bank after completion. The security by subrogation is not inconsistent with the security by deposit of title deeds. Each is an equitable security of the same rank, but the deposit of title deeds, if implemented, would enable the bank to impede or prevent any dealing with the legal estate in the property without the bank’s consent. I think that the security by deposit of title deeds can be regarded as a security which is additional to the security by subrogation rather than as a substitute for it.

 For these reasons I have come to the conclusion that the right of subrogation after completion of the sale was not excluded by the agreement for a deposit of the title deeds.

 The remaining issue is a question of company law. The company contends that the unpaid vendor’s lien is void against the liquidator because it is a security given by the company which was not registered in accordance with s. 99 of the Companies Act, 1963. That section is practically identical with the corresponding English provision in s. 95 of the Companies Act, 1948, which was considered by Brightman J. in  London Cheshire Co. v. Laplagrene Co. 3  Brightman J. held that an unpaid vendor’s lien was the creature of the law; that it did not depend on contract but on the fact that the vendor had a right to a specific performance of his contract and that, accordingly, it was not registrable under s. 95 of the Act of 1948. The learned judge pointed out that the provision in question had been in force since the Companies Act, 1908, but no one had suggested that it was the practice for a vendor to register an unpaid vendor’s lien when selling to a company. The lien is created on the formation of the contract of sale and the time for registration would expire 21 days thereafter. The lien is not discharged until the purchase money is paid on completion. If registration were necessary, every vendor selling to a company would be put to the inconvenience of having to register the unpaid vendor’s lien as a matter of course on the off chance that circumstances might arise which would render it necessary for the vendor to rely on the unpaid vendor’s lien. For the reasons given by Brightman J. I am satisfied that s. 99 of the Companies Act, 1963, does not require registration of an unpaid vendor’s lien arising on the purchase of property by a company.

 In this case the unpaid balance of the purchase money amounted to £54,000 and I declare that the bank is entitled to an equitable charge on the lands at Mountfieldstown in the county of Cork to secure that sum.

[The order of the Court made on the 12th December, 1977, declared that the plaintiff was entitled to an equitable charge on the defendant’s lands to secure payment of the sum of £54,000 together with the costs thereinafter awarded. On the 19th June, 1978, the Court by consent of the parties declared that the charge mentioned in the order of the 12th December, 1977, secured the payment of interest on the sum of £54,000 at the rate of 4% from the 13th October, 1969]

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Highland Finance v. Sacred Heart College of Agriculture

[1992] IR 472

Murphy J.           

 Whilst precise figures were not put in evidence, it appears that the repayment of the debt due to Highland by instalments of capital and interest payable by the co-operative out of the college’s milk account with them operated successfully and effectively for a period of more than two years until the appointment by the bank on the 2nd October, 1990, of the second defendant, Mr. McEllin, as receiver and manager under the debenture aforesaid.

 In these circumstances Highland do not claim that the written irrevocable authorisation of the college amounted either to an absolute assignment or a charge on any part of the assets or property of the college. What Highland contends is that the loans, having been provided by them for the purpose of discharging the purchase price of the milk quotas and having been used for that purpose, it, Highland, is entitled to stand in the shoes of the co-operative and to enjoy the same rights which the co-operative would have enjoyed as an unpaid vendor if the purchase price had not been discharged. The plaintiff contends that this proposition is fully supported by the decision of McMahon J. in  Bank of Ireland Finance Ltd. v. D.J. Daly Ltd.  [1978] I.R. 79. On the face of it this would appear to be so. In that case the learned judge clearly accepted that where monies are advanced for the purchase of property by the borrower then the lender is entitled to be subrogated to the rights of the vendor unless the bargain between the lender and the borrower is inconsistent with the retention of a right of subrogation. In the particular case McMahon J. held that the acquisition of an equitable (as opposed to a legal) security by the lender was not inconsistent with the right of subrogation.

 On behalf of the bank it is said that there does not appear to have been any argument made to McMahon J. as to the precise circumstances in which, or the reasons for which, a lender is subrogated to the rights of an unpaid vendor and that the learned judge assumed, rather than decided, that the right of subrogation arises in every case in which monies are advanced by a lender for the purpose of discharging the liability to a vendor unless the right of subrogation is lost as a result of the particular procedures adopted by the lender and borrower in any given case. What is said on behalf of the bank is that the right of subrogation arises only in special circumstances and even then can be lost for a wider range of reasons than those identified in  Bank of Ireland Finance Ltd. v. D.J. Daly Ltd.  [1978] I.R. 79.

 The general argument made on behalf of the bank is supported by citations from the speeches in  Orakpo v. Manson Investments Ltd.  [1978] A.C. 95. Lord Diplock is quoted at p. 104 as saying:

 “My Lords, there is no general doctrine of unjust enrichment recognised in English law. What it does is to provide specific remedies in particular cases of what might be classified as unjust enrichment in a legal system that is based upon the civil law. There are some circumstances in which the remedy takes the form of”subrogation”, but this expression embraces more than a single concept in English law. It is a convenient way of describing a transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred, and which takes place by operation of law in a whole variety of widely different circumstances. Some rights by subrogation are contractual in their origin, as in the case of contracts of insurance. Others, such as the right of an innocent lender to recover from a company moneys borrowed ultra vires to the extent that these have been expended on discharging the company’s lawful debts, are in no way based on contract and appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment.”

 The quotation from Lord Salmon at p. 110 of the report was to a similar effect and expressed in the following terms:

 “The test as to whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. It is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be.”

 One can see how the foregoing quotations would explain and justify the decision of the House of Lords in  Thurstan v. Nottingham Permanent Benefit Building Society  [1903] A.C. 6. In that case an infant borrower had entered into a contract to purchase a plot of land on which she wished to build. She borrowed from the defendant (who believed she was of full age) sufficient money to complete the purchase of the land and subsequently to erect the buildings. The defendant paid to the vendor of the lands the balance of the purchase price and the following day the infant purchaser executed a legal charge in favour of the defendant as security for present and future advances. Due to the mortgagee’s infancy this charge was void. In those circumstances the House of Lords upheld the defendant’s claim to a vendor’s lien in respect of the balance of the purchase monies which they had paid to the vendor. Certainly that was, or would have been, a classical case of unjust enrichment inasmuch as the infant would have obtained the full benefit of the property without any liability, secured or unsecured, in respect of the greater part of the purchase price.

 On the other hand it seems clear that the right of a vendor to subrogation in respect of a vendor’s lien is not limited to such meritorious cases. Many of the cases referred to in the judgment of McMahon J., and opened before this court, arose where the lender could not recover the monies lent by him or enforce securities because of a failure to comply with the requirements of the Moneylenders Acts, or, alternatively, where securities obtained by lenders had been invalidated due to the failure of the lender to procure registration of his charge in accordance with the requirements of the Companies Acts. As a result a variety of reasons have been given for the decisions of the courts in refusing to uphold the claim of a lender to the lien to which the original vendor was undoubtedly entitled. As Lord Salmon said, for example, it would be difficult to apply an equitable doctrine for the purpose of enabling a moneylender to escape the consequences of his breach of the Moneylenders Acts. Similarly, in respect of failure to register a charge under the Companies Acts, the courts have pointed out that a lender can hardly complain if he has “obtained all that he bargained for” and the lack of security is due to his own default. Perhaps it would have been more satisfactory if the logical basis for subrogation in circumstances such as the present had been analysed more carefully at the outset but it does seem to me that precedent culminating with the decision of McMahon J. has established that prima facie, a lender who advances money for the express purpose of those monies being applied in payment of the purchase price of property is entitled to the lien to which the vendor would have been entitled if the purchase price of the balance thereof had not been paid unless there is a bargain between the lender and the borrower which is inconsistent with an intention of the parties that the lender should acquire that right.

 All the cases would seem to be in agreement that the taking of a valid legal charge by the lender would be inconsistent with the preservation of the vendor’s lien. Even then it is not altogether clear how or why this principle operates. All of the judges by whom the point was considered recognised of course that a vendor’s lien, being an equitable charge, would merge in the legal charge when they both had come into existence. What is less clear is whether a mere agreement for a legal charge would negative the existence or continuation of the vendor’s lien.

If that were the case it would have seemed unnecessary to consider the failure of the borrower actually to provide, or of the lender to register, a legal charge as long as the bargain between them had provided for such security.

 On the other hand it is equally clear from precedent that the fact that the borrower agrees to provide, and does provide an equitable security, is not inconsistent with the maintenance of the vendor’s lien. Apparently it is not simply a case of a lender negotiating and enforcing a bargain satisfactory to him. To exclude the vendor’s lien the bargain must contain some provision, whether relating to the nature of the security or otherwise, which is inconsistent with the maintenance of the vendor’s lien.

 Is the arrangement for the repayment of the Highland loans inconsistent with the preservation of the vendor’s lien to which the co-operative would have been entitled if the purchase price or the balance thereof had not been paid? Certainly there are difficulties in reconciling the specific detailed arrangement by which the loans were to be repaid by instalments over a period of years together with interest through the co-operative with the continuance of an equitable charge to secure the immediate payment of the original purchase price or any balance of it.

 On the other hand it is established by the authorities that a vendor’s lien, as such, is not lost merely because the vendor accepts a promissory note for the payment of the balance of the purchase price (see  Hughes v. Kearney  (1803) 1 Sch. & Lef. 132); nor is the lien inconsistent with the payment of the original purchase price by instalments (see  Nives v. Nives  (1880) 15 Ch. D. 649). However the coincidence of a security for a debt payable on demand and an express arrangement that the lender, who claims to be subrogated to that security, is not to be repaid otherwise than by instalments over a period of not less than six years is not easy to reconcile. This particular problem was adverted to, though in less dramatic circumstances, by Lord Salmon in  Orakpo v. Manson Investments Ltd.  [1978] A.C. 95 at pp. 110-111 in the following terms:

 “To apply the doctrine of subrogation in the present case would be absurd. In each of the transactions with which it is concerned, the contract of loan provided that the money should be lent ‘for a period of 12 months with interest at the rate of 1 and a half per cent permonth (18% per annum).’ In two of the transactions, the money loaned was used to pay the purchase price of property which the borrower had contracted to buy. In the other transactions it was used to pay off prior legal or equitable charges on property which the borrower had acquired. If the lender was subrogated to the rights of the former unpaid vendors and chargees, then the lender’s cause of action to enforce those rights against the borrower, i.e., to claim the money paid to the vendors and to the chargees, arose at the time when the money was paid by the lenders. Accordingly it follows that if the doctrine of subrogation were applied, the borrower, instead of being able to keep the borrowed money for 12 months (as the contract of loan provided), would be under a legal obligation to repay it almost as soon as it had been received; a strange result to follow from the application of an equitable doctrine.”

 Counsel for Highland challenged this observation of Lord Salmon on the ground that there would always be some conflict between the terms and dates of repayment of the monies advanced and those on which the original purchase price should have been paid. It may be that this is a matter of degree. It may be that where a loan is advanced by way of bridging finance, or where the loan is made by bankers on terms that it is repayable on demand, that one would not necessarily conclude that the bargain between the lender and the borrower is inconsistent with the right of subrogation; but in the present case it seems to me that the unique and complex provisions for the repayment of the debt plus interest over a lengthy period by a third party who will or should have in his hands monies of the borrower derived indeed from the very property which was acquired with the loan is inconsistent with a security which could have been realised forthwith.

 Accordingly the appropriate inference is that the parties did not intend the preservation of the vendor’s lien. It follows that the plaintiff’s claim must be dismissed.

 Perhaps I should add that the very helpful arguments made to the court did raise interesting questions as to the justification for allowing a right of subrogation in the generality of cases where a lender advances money to enable the borrower to discharge the purchase price of property. I see the force of the argument made on behalf of the bank which was based largely on an article by Ms. Jill Martin in the Modern Law Review, 1975. Ms. Martin argued that the right of subrogation should be confined to those cases (of which  Thurstan v. Nottingham Permanent Benefit Building Society  [1903] A.C. 6 would be an outstanding example) where the lender has no right of action in personam against the borrower, so that in the absence of a right of subrogation the borrower would be unjustly enriched.