Clydesdale Bank Plc v John Workman & Ors

The main issue on this appeal is whether HHJ Pelling QC was right, on the basis of the facts that he found, to conclude that two solicitors were guilty of dishonest assistance in a breach of trust. The breach of trust in question was a mortgage fraud which resulted in the borrower obtaining all the proceeds of sale of large parts of the mortgaged property in fraud of the lender. The judge’s judgment is at [2013] EWHC B38 (Ch), [2014] PNLR 18. First it is necessary to set out the background facts.

Lord Edward Developments (Beechwood) Ltd (“the company”) is a development company. It is one of a number of single venture companies under the ultimate control of Mr Tibbetts. Mr Tibbetts had been an accountant before he became involved in property development. The judge found that there was nothing to suggest that Mr Tibbetts was untrustworthy before the events that gave rise to this case. In the middle of 2006 the company was interested in acquiring property known as Beechwood in Stourbridge in the West Midlands. The property consisted of Beechwood itself and three plots of land, referred to as Plots 2, 3 and 4 which had development potential. It is those three plots of land with which this case is concerned. In order to finance the acquisition the company negotiated a facility with Yorkshire Bank (“the Bank”). The facility was for £1.99 million and the company drew down £1.35 million to help with the initial acquisition. The purchase price was £1.75 million. The borrowings were intended to be secured by a charge by way of legal mortgage and a deed to that effect was executed by the company. The Bank’s solicitors at the time were BPE, and the partner responsible was Mr Billings. Mr Billings both knew and trusted Mr Tibbetts for whom he had acted in the past. Mr Billings’ duties included ensuring that the Bank’s charge was properly registered at HM Land Registry. However, although Mr Billings registered the charge at Companies House, he failed to register it at HM Land Registry. This is where everything began to go wrong.

Section 27 (2) of the Land Registration Act 2002 says that the grant of a legal charge over a registered estate is a disposition that is required to be completed by registration. Section 27 (1) says that if a disposition is required to be completed by registration, it does not operate at law until the relevant registration requirements are met. It follows therefore that the Bank’s charge did not operate at law. It operated only in equity.

Following completion of the initial acquisition there remained the task of negotiating an easement of drainage. The solicitor acting for the company at that stage was Mr Murphy of Cobbetts, an associate under the supervision of Mr Denslow, a partner. Cobbetts had also acted for the company on the initial acquisition (but not these two particular solicitors). The judge was very unimpressed with the competence of both these men both in terms of their legal knowledge and their commercial awareness. He said of Mr Murphy that he was neither a sophisticated legal thinker or lawyer, nor someone who thought much, if at all, beyond the next step that had to be taken in the transaction with which he was concerned. He also found that Mr Murphy had neither the skills nor the experience to question what he was being told as reflective of anything other than the true position; and that he was regrettably incompetent outside the very narrow confines of the area with which he was familiar, namely bona fide conveyancing transactions. But as he recognised he was not trying a claim for negligence.

In May 2007 the company instructed Cobbetts to act on a sale of plot 3 to a Mr Davies. The plot had not yet been developed; and the structure of the deal was that Mr Davies would pay £525,000 for the plot itself, and a further £750,000 for the assignment of a JCT contract under which the plot was to be developed. Mr Murphy was the solicitor at Cobbetts to whom the work was entrusted.

In October and November 2007 the Bank wrote to Cobbetts, asking for relevant documents. Although Cobbetts were slow to respond, Mr Murphy contacted the Bank in December. The judge accepted the accuracy of Mr Murphy’s attendance note of his conversation with Mr Ellis of the Bank. He told the Bank that “not only was there no registered mortgage on the registered title but [he] had no information about it.” Mr Murphy’s note went on to record that the letters had been intended for BPE rather than Cobbetts who had acted for the Bank on the acquisition. Cobbetts had no copy of the Bank’s charge. Following his conversation with Mr Ellis, Mr Murphy wrote to Mr Stapleton, a director of the company, on 6 December 2007. His letter said:

“Beechwood, Ounty John Lane, Pedmore.

I have received a letter from Yorkshire Bank asking for the deeds of this property.

I cannot see that there has been any previous correspondence by Cobbetts with Yorkshire Bank and when I phoned them it emerged that the letter should have been addressed to BPE who they said acted in respect of the mortgage on the title. There is no mortgage registered against the title.”

Mr Murphy e-mailed a copy of this letter to Mr Billings. On 11 December, unknown at the time to Mr Murphy or Mr Denslow, the company executed a first charge over the property in favour of Mr Hayward (“the Hayward charge”) purporting to secure a loan of £600,000. The charge was registered at HM Land Registry on 15 December 2007. However, it was not registered, as it should have been, at Companies House. Something seems to have gone wrong with the process of registration at HM Land Registry at this stage, because where a chargee under a charge granted by a company applies to register it at HM Land Registry, rule 111 of the Land Registration Rules 2003 requires production of the certificate of registration under the Companies Act. If it is not produced rule 111 (2) requires the Registrar to make a note on the register to that effect. No such note was made in the present case. Neither Mr Murphy nor Mr Denslow ever saw a copy of the Hayward charge.

Section 29 (1) of the Land Registration Act 2002 provides:

“If a registrable disposition of a registered estate is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration.”

On the face of it, therefore, the registration of the Hayward charge postponed the priority of the Bank’s charge. The effect of that was that the chargee under the Hayward charge was entitled to receive any proceeds of sale of the land, up to the limit of what was secured by the Hayward charge, before the Bank was entitled to any part of those proceeds. Section 48 of the Land Registration Act 2002 provides:

“Registered charges on the same registered estate, or on the same registered charge, are to be taken to rank as between themselves in the order shown in the register.”

In general applications are entered on the register in the order in which they are received by HM Land Registry. That means that even if the Bank had registered its charge subsequent to the registration of the Hayward charge, the Bank’s charge would not have regained priority over the Hayward charge.

In February 2008 Mr Murphy was told that the company proposed to sell plots 2, 3 and 4 to Mr Tibbetts. On 13 February 2008 Mr Murphy received a letter from M. J Darby & Co, solicitors acting on the purchase in the following terms:

“Dear Mr Murphy,

Re: sale of land at Ounty John Lane

Your client: Beechwood Properties (Pedmore) Limited.

I understand that you are instructed in the Sale of three plots, Nos 2,3 and 4 at the development by Beechwood Properties (Pedmore) Limited and I confirm that I am to act for the Purchaser.

Would you care to let me have contract documents at this stage with appropriate Land Registry approved scale plan so that I can carry out searches”

In the days that followed Mr Murphy and Mr Denslow were under the impression that there was the prospect of a contract race. This was because of the ongoing correspondence about the sale of plot 3 to Mr Davies. However, Mr Tibbetts told Mr Murphy that he was the buyer of all three plots: at a price of £550,000 for plot 2, and £475,000 each for plots 3 and 4. The judge said that Mr Murphy was thus aware that plot 3 was to be sold to Mr Tibbetts for £475,000 when previously it was to have been sold to Mr Davies for over £1 million. In so saying it seems to have slipped the judge’s mind that Mr Davies had agreed to pay £525,000 for the plot itself and the additional £750,000 for the assignment of the JCT contract. Mr Tibbetts was proposing to buy only the plot. Mr Murphy asked Mr Stapleton for an explanation. The explanation was that the transfer to Mr Tibbetts “was merely connected with financing” and that in due course the deal with Mr Davies about plot 3 would still go ahead. Mr Murphy passed on this information to Mr Davies’ solicitor. The judge held that Mr Murphy was naïve to have accepted this information at face value, but none the less held that, at least at this stage, he was not aware of anything untoward.

The judge also found that, at this stage, Mr Murphy was unaware that the Bank had the benefit of an unregistered charge over the property to secure its lending. Towards the end of February 2008 Mr Murphy was instructed to proceed with the sales to Mr Tibbett “with all speed”. In the following month he and Mr Denslow moved firms, from Cobbetts to Shoosmiths. Mr Darby (of M.J. Darby & Co) acting for the purchaser wrote to Mr Murphy on 14 March. Mr Darby’s letter said:

“My instructions are that Mr Tibbetts is taking Transfers of the three plots in part settlement of debts owed by the Seller under the terms of the Registered Charge.

I understand that Russell Hayward, the Mortgagee is acting in a representative capacity on behalf of Mr Tibbetts so that part of the consideration on completion will be satisfied by the reduction of the balance outstanding on the Registered Charge.

I am asking for clarification of the figures but I should be grateful if you will confirm please that you have similar instructions and in which case both the Contract and the Transfer will need to be amended to reflect these circumstances.

…

At the present time it appears that the consideration in respect of Plots 3 and 4 is subject to the proviso that part of the consideration is in settlement of the debt due to Mr Tibbetts, but I am told that the purchase of Plot 2 is to proceed on an arms length basis, so subject to the comments on the Transfer indicated above, I believe we can proceed on that matter sooner rather than later.

Can you therefore let me have a draft Transfer in respect of Plot 2 on the assumption that this is a straightforward purchase at the price of £525,000 and I can then submit my Report on Title to my Building Society

…

6.

You will appreciate from the body of this letter that the Contracts and the Transfer documents in respect of Plots 3 and 4 need to reflect the fact that the Transfers arise as a result of the default of the Seller in discharging the payments due under the Registered Charge and that the Transfers are accordingly in settlement in each case of part of that liability…”

Let me pause for a moment to consider what this letter would have told Mr Murphy. It would have told him:

Mr Murphy replied on 20 March. He said:

“I was not aware of any mortgage having been granted to Mr Hayward. I do not see that this needs to be referred to in the Transfer of Plot 2 and even in respect of Plots 3 and 4 presumably it is merely a question of agreeing the sum to be paid over in discharge of the loan.”

Mr Murphy also carried out a search at HM Land Registry. That search revealed the existence of the registered Hayward charge, and its date; but not the amount secured by the charge. Mr Darby replied to Mr Murphy on 27 March in a letter reiterating that the sale of plots 3 and 4 was in part satisfaction of the debt due to Mr Hayward as nominee for Mr Tibbetts. He said:

“The Contract must reflect the fact that the properties are to be transferred in each case in part satisfaction of the debt due to Mr Hayward….

Could you please therefore let me have a draft Contract covering Plots 3 and 4 reflecting the fact that the Transfer of the properties is to be at least in part, in consideration of discharge of the security.

As I understand it no funds are to be paid to your client but I am checking upon this point. Do you have instructions in relation to it?”

Mr Darby’s asserted understanding that “no funds are to be paid to your client” is also consistent with the amount secured by the Hayward charge being more than the proceeds of sale of those plots.

Thereafter, as the judge put it, two tracks were maintained in the correspondence: one for plot 2 and one for plots 3 and 4. The sale of plot 2 was proceeding as an “ordinary” sale for £550,000. That sale would require the release of the Hayward charge over plot 2. So on 14 April 2008 Mr Murphy wrote to Mr Hayward enclosing a form of discharge. Mr Hayward replied on the same day in the following terms:

“Dear Mr Murphy,

Re: Plot 2 Beechwood.

As you will know, I have a legal charge over the above property as part of a charge on the entire site.

I understand that the plot has now been sold for a sum of money less than that of the indebtedness.

I am prepared to release the charge on Plot 2 to enable its completion. Please remit the entire proceeds (less your agreed charges) to MJ Darby & Co Client Account…

I will then negotiate with the directors of Beechwood about the amount of monies I am prepared to release back to them.”

Once again Mr Murphy was told (this time by Mr Hayward) that the plot was being sold for a sum less than the indebtedness. Mr Murphy did not, however, know how much was secured by the Hayward charge, and took instructions from his client about whether the proceeds of sale could be paid to Mr Hayward. Mr Stapleton told him on 15 April that they could. The sale of Plot 2 was completed on 16 April 2008. In accordance with an undertaking that he had given Mr Darby, Mr Murphy remitted the sale proceeds to Mr Darby (less certain sums) to be held to his order until the Hayward charge over that plot was discharged. The form of discharge was also dated 16 April.

On the following day Mr Murphy e-mailed Mr Stapleton. His e-mail said:

“Tony

You may recall that I had a letter from Yorkshire Bank about a charge last year which was referred to BPE. You told me that there was no money outstanding on it.

BPE have just written to me with a copy letter of 7th June 2006 stating that they had registered a charge in favour of the bank at Companies house & asking whether Cobbetts would be dealing with registration on their behalf.

Clearly if a charge is registered then releases will need to be obtained for each and every sale and furthermore the charge to Mr Hayward will need to be postponed.

If you have not drawn down any funds I suggest that you instruct BPE to notify the Bank that you are not to proceed with the charge at all.

Please let me know what is happening as soon as possible as this will need to be sorted out before any further sales are effected.”

Why he thought that the Hayward charge “will need to be postponed” is obscure, since it had already gained priority over the Bank’s charge. On the same day Mr Murphy e-mailed Mr Billings (who was still acting for the Bank). He told Mr Billings that there was a registered charge in favour of Mr Hayward over the property; that one plot had already been sold, and that two more were due for completion the following week. He also tried (unsuccessfully) to speak to Mr Billings. There was some confusion at the time about whether funds had indeed been drawn down from the Bank’s facility; if they had for what purpose they had been drawn down; and if they had been drawn down whether they were secured on Beechwood. Mr Murphy’s assessment was:

“If, as is likely, Beechwood was charged and funds have been drawn down from Yorkshire Bank [for whatever purpose] then there is a major problem which can probably only be solved by paying off the Bank.”

In response to a further communication from Mr Billings, Mr Murphy repeated in his e-mail to him of 18 April that the proceeds of sale of plot 2 had been “forwarded to the registered mortgagee, Mr Hayward” and repeated that his client was “anxious to go ahead with 2 more sales next week.” On 21 April 2008 Mr Murphy and Mr Stapleton had a telephone conversation which Mr Murphy recorded:

“Tony Stapleton phoning JM. He was aware that there were discussions between Paul Tibbetts and Mr Hayward. He confirmed to JM that there was about £2 million drawdown on the Yorkshire Bank loan. JM confirming that regardless of the registration or absence of it, the limited company was still liable for this and could be sued — TS also mentioning to JM that he was joint and severally liable in a personal guarantee for £200,000.

JM pointing out that if any money was to go to Yorkshire Bank from the sale of Plot 2 then clearly Mr Hayward needs to agree to this. The figure would also need to be agreed with Yorkshire Bank.”

The judge commented at [84]:

“It is undeniable that as a result of this conversation Mr Murphy was now fully informed of the position. He was aware that there was a charge in favour of the bank that should have but had not been registered. He was aware that the company had drawn down about £2 million that should have been but was not secured by a fixed charge registered at the Land Registry. Thus he was aware that the bank had an equitable interest in the proceeds of plot 2 and would have such an interest in the proceeds of sale of plots 3 and 4.”

I think, with respect, that that is not quite right. The Bank would only have 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 the Hayward charge. It is, perhaps, also worth noting that Mr Murphy’s advice that if any money were to go to the Bank Mr Hayward would have to agree is consistent only with the Hayward charge having priority over the Bank’s charge.

On the following day Mr Billings informed Mr Murphy that he was immediately arranging to register the Bank’s charge. Mr Murphy replied later that morning that he had been instructed to go ahead with completion of the sales of plots 3 and 4. Mr Billings immediately asked for details, but Mr Murphy received instructions from Mr Stapleton not to supply them; so he did not. Mr Billings did not, however, specifically ask how much the Hayward charge secured.

Right up to this point the judge had acquitted Mr Murphy and Mr Denslow of any dishonesty. He also found that there was no motive for dishonesty; and although that finding was made in relation to plot 2, Mr Stewart QC for the Bank accepted that it was equally applicable to plots 3 and 4. In the light of his findings so far the remaining question was whether solicitors who had been honest up to 21 April became dishonest almost overnight. It is pertinent to note at this point that the company’s instructions were given by men whom Mr Murphy and Mr Denslow had known for some time, and whom they had no reason to distrust. Having rejected the allegation that Mr Murphy and Mr Denslow were dishonest in relation to plot 2, the judge turned to consider plots 3 and 4. The judge continued at [87]:

“In reality, therefore, it is what happened thereafter and in relation to plots 3 and 4 that the Claimants must focus on. Mr Murphy and Mr Denslow say that they discussed whether they should follow Mr Stapleton’s instructions. They could have relatively easily but did not:

a.

Consult other partners in the Third Party firm;

b.

Consult the Law Society or the SRA;

c.

Consult the risk management team within the Third Party; or

d.

take Counsel’s advice.

They did none of these things. They say that they concluded that they should act in accordance with their instructions and that the end result was that the transfers of plots 3 and 4 were completed and on 24 April 2008 Mr Murphy informed Mr Billings of that fact.”

He reasoned at [93]:

“The position in relation to the transfers of plots three and four is more difficult from the Third Party’s perspective. As I have explained, by 17 April 2008 Mr Murphy was aware that there had been drawdowns by the company that should have been but were not secured by registration of the bank’s charge. By 21st April, Mr Murphy knew that the sums drawn down were £2 million and that regardless of whether the charge was registered the company was liable to the bank and indeed that the bank had an equitable interest in the property and the proceeds of its sale. Mr Murphy was also aware that the property was being sold to a connected party, Mr Tibbetts, for a sum that was less than the sum of the loan of the bank, which would be paid back to Mr Tibbetts in his capacity as a beneficial chargee under the Hayward charge in circumstances where Mr Murphy had not been told how much was secured by the charge. Finally and perhaps critically, he had been instructed not to give any further information to Mr Billings.”

The judge posed himself the question:

“…whether with the knowledge they had, the decision to continue to participate was contrary to normally acceptable standards of honest conduct.”

He decided that it was. His reasoning is at [94]:

“I conclude that an honest solicitor with the knowledge available to Mr Murphy, the relevant elements of which I have summarised, and by 21st April 2008, Mr Denslow would not have proceeded as they decided to do. The reality is that by 10.21 on 21st April when the instructions were given to proceed without telling Mr Billings what was happening they were each being asked to participate in a transaction which, on the face of it, defeated the entirely legitimate interests of the bank. In those circumstances, an honest solicitor would have informed his client that either there must be full disclosure to the bank and its solicitors, coupled with a standstill for a reasonable period, in order to enable the bank to consider its position, or the firm could not continue to act. If and to the extent that the firm was holding funds relevant to the transactions then an honest solicitor if forced to discontinue from acting would either have commenced proceedings joining its former clients and the bank as parties for the purpose of obtaining directions as to how the funds were to be dealt with or perhaps inviting their former clients to sue them for the fund and joining the bank, but in either case, for the purpose of enabling the bank and the solicitors’ former client to resolve who was entitled to what, with the firm in effect dropping out of the picture—in effect interpleading. Merely advising the client as to the position of the company vis-à-vis the bank was plainly not a sufficient response.”

As I see it, the critical element in the judge’s reasoning is that (a) the contemplated transactions (i.e. the completion of the sales of plots 3 and 4) defeated the legitimate interests of the Bank and (b) Messrs Murphy and Denslow knew that to be the case. However, I do not consider that the judge sufficiently analysed what were the “legitimate interests” of the Bank. Let me reiterate what I believe to be the legal position. Mr Hayward was, on the face of it, the proprietor of a registered charge. That charge had 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 chargee, and would remain in that position even if its charge were registered at HM Land Registry, because the Bank’s charge would have been registered after the Hayward charge and would therefore appear after the Hayward charge on the register. Consequently the Bank’s “legitimate interests” were whatever remained of the sale proceeds once Mr Hayward had been paid off to the extent of his security.

It is also worth noting at this stage findings that the judge did not make. He did not find that Messrs Murphy and Denslow (a) knew that the Hayward charge was a sham (as it is now conceded to have been) or (b) knew it secured less than the proceeds of sale or (c) refrained from asking how much it secured for fear of what they might learn in that respect. Indeed none of those propositions was put to either Mr Murphy or Mr Denslow in cross-examination. The critical question, as it seems to me, is not what Messrs Murphy and Denslow knew about the Bank’s charge (which is what the judge focussed on), but what they knew or believed about the Hayward charge. The judge made no explicit finding. In my judgment the honesty of Mr Murphy and Mr Denslow is to be assessed against what they believed the facts to have been.

It is therefore necessary to look at their evidence about their state of mind at the time. I start with Mr Murphy who had day to day conduct of the matter. In his witness statement he said:

“(a)

I believed that the Hayward Charge was genuine and that it was likely to be registered at Companies House …although I did not check the point; (b) My legal analysis was that the Hayward Charge therefore had priority over the Charge (which was not registered); (c) I discussed the question of priorities with Mr Denslow at length. It’s fair to say that we agonised over the issue and ultimately came down to the view that the Hayward Charge trumped Yorkshire’s Charge; (d) I was uncomfortable with the conclusion as was Mr Denslow, as I saw that proceeding on the Company’s instructions would likely expose BPE to a claim by Yorkshire. However, I was not retained by Yorkshire at any stage and therefore did not owe them a duty of care, particularly in circumstances where they had their own solicitors acting … which solicitors were aware of the proposed sale; (e) I recognised that the Company was proposing to act in a way that was in breach of the conditions of the Charge; although I admit I did not seek to obtain a copy of the mortgage conditions or investigate this further.”

Mr Murphy was cross-examined on Day 3. His cross-examination contains the following exchanges about the Hayward charge and completion of the sales of plots 3 and 4:

“Q. How did you know whether or not you were protecting the company’s interests without knowing what the amount of the charge was?

A. … I was relying on instructions from the company with regard to the amount of the charge.

Q. What were those instructions?

A. Well, the instructions in due course were to send the entire sale proceeds, net of various items …

Q. Explain to me how, on behalf of the company, you can accept instructions to send what, on this hypothesis, is the company’s money to a third party without having any idea what the amount of the charge is?

A. I relied on the company’s instructions. I took it for granted that they wouldn’t be instructing me to pay more than the amount secured by the charge to the chargee.”

At a later point in his cross-examination was the following exchange:

“A… I mean I accept that, you know, in practice the three plots were sold and all the proceeds did go to Mr Hayward. So that I’d assumed that the loan was more than the combined sale. But …

Q. Did you discuss this at the time with Mr Denslow?

A. Probably. But I don’t remember the [exact] details of these questions…”

Still later was the following:

“Q. You had no idea, did you, of what the amount actually owed to Mr Hayward was?

A. Well, I took it for granted it was more than the sale proceeds because of the fact I’d been instructed to pay the entire net sale proceeds to Hayward’s solicitors.

Q. You had no idea how much Hayward was owed, did you?

A. Well I can only repeat what I said: I didn’t know anything more than what the client told me.”

The final relevant exchange was as follows:

“Q. You need to make sure that the company receives value for those in order to protect the interests of the bank’s creditors, including in particular Yorkshire Bank, and you’re going to hand over the monies to someone when you have no idea what that person is owed?

A. Well, I was relying on the client instructions to say the amount they owed.

Q. We have been through this. You didn’t have any instructions, did you?

A. Well, I had instructions to remit the entire proceeds so that is what I assumed.”

Mr Denslow, who was the supervising partner, said in his witness statement:

“I do recall that John Murphy and I discussed the question of priorities of Land Registry charges. We ultimately came to the view that the Hayward Charge ‘trumped’ Yorkshire’s Charge as it was registered at the Land Registry and that we should follow our client’s instructions on the sale of the Property. I readily admit that the decision that was reached made me feel uncomfortable, because I thought it may expose BPE and indeed a professional colleague, Mr Billings, to a negligence claim by Yorkshire in due course. I had known Mr Billings since 1977. Indeed, I was articled to Mr Billings …, worked for his firm upon qualification and was a partner of his from 1988 to 1999 and we had a friendly working relationship. However, I did not consider that it was a matter in which we had any choice.”

Mr Denslow was cross-examined on Day 2. His cross-examination contained the following:

“Q. It’s right, isn’t it, you know full well, that you didn’t know what the amount of Mr Hayward’s charge was?

A. I honestly – I don’t recall.

…

Q. Do you not accept that before paying monies to someone who is claiming to be a charge holder you need to find out the amount of the charge?

A. Yes, I accept that.

Q. You know, by the time of the second and third sales, that Yorkshire bank had had a legal mortgage and hadn’t received any payments, don’t you?

A. Yes.

Q. And yet in relation, you say, to the third property, but not the second, you let the money go out of your door to someone who claimed to be a charge holder with no idea at all what the amount of the charge was.

A. I’m … I’m not sure whether that last part of your statement is correct that we had no idea what the amount of the charge was.

Q. What do you say was the amount you did think it was for?

A.

More than the amount which we were sending.”

A little later he said:

“… my recollection is that we understood that Mr Hayward was entitled to the monies. And that we were forwarding the monies to somebody who was entitled to the monies.”

If (and I stress the word “if”) Mr Murphy and Mr Denslow believed that Mr Hayward’s registered charge secured an amount greater than the aggregate of the sale price of the plots, then as between Mr Hayward and the Bank Mr Hayward was entitled to the monies. In that event even though Mr Murphy and Mr Denslow had notice of the Bank’s charge they would have been entitled (indeed obliged) to pay over the sale proceeds to Mr Hayward’s solicitors. The same would have been the case even if the Bank had registered its charge shortly before completion. There would have been no breach of trust because Mr Hayward’s legal rights would (as Mr Murphy and Mr Denslow both concluded) have trumped whatever rights in equity the Bank had, and would have had priority over whatever rights at law the Bank had. And in giving effect to those legal rights, the two solicitors would not have been acting dishonestly. On the contrary they would have been acting in accordance with the law.

Mr Murphy and Mr Denslow both gave evidence that that was their belief, as the extracts from the cross-examination show. There is some outside support for that belief in what they had been told not only by their own client and Mr Hayward but also by Mr Darby (who was himself a solicitor albeit acting for Mr Hayward and Mr Tibbetts and also, as we were told, unknown to Mr Murphy and Mr Denslow implicated in the eventual fraud).

As Mr Stewart pointed out this defence was not pleaded, despite the fact that one of the alternative pleas made against Messrs Murphy and Denslow was that there was no justification for paying out more than the amount required to redeem the Hayward which was asserted to be £600,000 plus interest. Nor was the point flagged up clearly in their witness statements, although both had said in those statements that they had discussed the position and had formed the view that the Hayward charge “trumped” the Bank’s charge. However, no pleading point was (or is) taken; and the point was put to the judge in the written closing arguments on their behalf:

“In summary, Mr Denslow’s and Mr Murphy’s view was that the Hayward Charge “trumped” the Charge, because (on the instructions he had received, even if Mr Denslow was not wholly aware of them) the amount still outstanding on the Hayward Charge was more than the intended net sale proceeds of the plots.”

The judge made no findings at all about any of this. He referred briefly to the discussion that Mr Murphy and Mr Denslow had had; but did not discuss why Mr Murphy and Mr Denslow came to the view that the Hayward charge “trumped” the Bank’s charge or what they meant by “trumped”. He made no findings about their belief as regards the amounts secured by the Hayward charge.

Mr Stewart made sustained submissions on the facts to support the judge’s conclusion despite the lack of a specific finding on this issue. Essentially there were three points. First, he said that the judge had in fact made findings of fact that were inconsistent with this defence. Second, he said that the evidence that Mr Murphy and Mr Denslow gave on this topic was incapable of belief. Third, he said that in any event they had accepted that they were aware of at least the possibility of the Bank having some rights over the property and that was enough to amount to dishonesty.

Mr Stewart first relied on the judge’s finding at [10] and [11] that both Mr Murphy and Mr Denslow understood the effect of “a legal charge” that had not been registered against the property. An unregistered charge over property with registered title is not, of course, a “legal charge”, but perhaps nothing turns on that. Next Mr Stewart points to the judge’s finding at [93] that “Mr Murphy knew that … the bank had an equitable interest in the property and the proceeds of its sale.” The finding that Mr Murphy knew that the Bank had an equitable interest in the proceeds of sale is, he argued, consistent only with a finding that Mr Murphy knew that the amount secured by the Hayward charge was less than the proceeds of sale. I do not consider that it is possible to draw that inferential conclusion from the judge’s finding. For one thing it was never the case against Mr Murphy (or Mr Denslow) that they knew that the Hayward charge secured less than the proceeds of sale. The case was that they had no idea how much it secured. If, by his finding, the judge was intending to deal with the point that had been made on their behalf he could have said no more than that Mr Murphy knew that the bank might or might not have had an equitable interest in the proceeds of sale. In addition the judge’s finding at [93] is an echo of his earlier statement at [84] which was made without any consideration as to what Mr Murphy knew about the Hayward charge.

Mr Stewart made cogent submissions on why the evidence of Mr Murphy and Mr Denslow about their belief as to the amount secured by the Hayward charge should not be accepted. But those were, in my judgment, submissions that ought to have been considered by the trial judge and are not matters for this court. We in this court are not in a position to make the necessary primary findings of fact about the contemporaneous belief of Mr Murphy and Mr Denslow, dependent as they are on the oral evidence. I do not consider that it is possible for this court to decide that oral evidence given by professional men on this point should not be believed when the trial judge has made no finding to that effect. I appreciate that the judge made some critical observations about the credibility of Mr Denslow on some issues; but the fact remains that he found that, at least until 16 April 2008, they acted honestly.

By Respondent’s Notice (amplified in the skeleton argument) a number of additional facts were drawn to our attention which were said to be additional support for the judge’s conclusion. However none of them addressed what I consider to be the critical issue: what was the belief of Mr Murphy and Mr Denslow about the status and extent of the Hayward charge? The additional facts relied on do not, in my judgment, repair this deficiency in the judge’s reasoning.

That brings me to the third way in which Mr Stewart put the case. He said that it was sufficient to prove that Mr Murphy and Mr Denslow had been reckless as to the existence of the Bank’s equitable rights. It was reckless to have allowed the entirety of the sale proceeds to be paid to Mr Hayward without making further enquiry about the extent of the monies secured by the Hayward charge. I am not convinced that recklessness is equivalent to dishonesty in this area of the law, although it is undoubtedly evidence of dishonesty. Lord Nicholls made the point in Royal Brunei Airlines v Tan [1995] 2 AC 378. At 389 he said:

“Imprudence is not dishonesty, although imprudence may be carried recklessly to lengths which call into question the honesty of the person making the decision. This is especially so if the transaction serves another purpose in which that person has an interest of his own.” (Emphasis added)

In this case, of course the judge found that Messrs Murphy and Denslow had no motive and therefore no “interest of [their] own”. At 390 Lord Nicholls said:

“Acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.” (Emphasis added)

Again Lord Nicholls is not saying that recklessness is dishonesty; it is (or rather can be) a sign of dishonesty. If the judge had found that Mr Murphy and Mr Denslow did not care whether or not the Hayward charge secured more than the proceeds of sale, that would perhaps have been reckless and a sign of dishonesty. But he did not make that finding. Moreover, Mr Murphy did seek advice from his supervising partner; and their evidence was that they discussed what they ought to do. They both said that after discussion they concluded that the Hayward charge “trumped” the Bank’s charge. Both Mr Murphy and Mr Denslow also said that they took comfort from the fact that Mr Billings, who had been on notice of the sales of plots 3 and 4 for several days, had not asked for those sales to be deferred or suspended. And if, as they said, they believed that the Hayward charge secured more than the proceeds of sale, then their conclusion is readily explicable. In Royal Brunei Airlines v Tan Lord Nicholls said at 391:

“… when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.”

What, in my judgment, is missing from the judge’s analysis is any consideration of why Messrs Murphy and Denslow acted as they did. It is true that the judge found that they followed the instructions given to them by their client, but that in my judgment is to stop the inquiry too soon. Why did they take the view that they had to follow their client’s instructions? If they had simply decided that they had to follow their client’s instructions willy-nilly that might be sufficient to found a conclusion that they were reckless. But their evidence was not that their client’s instructions trumped the Bank’s charge: it was that the Hayward charge trumped the Bank’s charge.

I certainly do not say that the judge was bound to accept their evidence that they believed that the Hayward charge secured more than the proceeds of sale. But in my judgment he ought to have confronted that defence head on. Unless he was able to conclude that he did not believe it (which he did not say) I do not consider that he was entitled to find that they were guilty of dishonesty. A finding of dishonesty, especially against a solicitor, should not be made without the most careful consideration of what the solicitor says in his own defence. In my judgment the judge simply failed to deal with what was, at least potentially, a good defence.

Mr Stewart also warned us, in strong terms, against disturbing a finding of fact made by an experienced trial judge, especially when that finding of fact was a finding about a person’s state of mind. I readily accept that an appeal court should be most reluctant to interfere with a trial judge’s finding of fact unless driven to it. I have said so myself many times (see for example Fage UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5, [2014] FSR 29 at [114]). But this is not simply a question of reversing the judge’s finding of fact. In this case the judge has, in my judgment, failed to deal with a critical issue which was a necessary building block to his ultimate conclusion that Messrs Murphy and Denslow were dishonest.

Although it was not asked for in the Respondent’s Notice, Mr Stewart said that if we were against him (as I am) we should remit the case for retrial on the issue that the judge did not deal with. I would reject that invitation. The case against Messrs Murphy and Denslow, as put to the judge, was one of participation in a sophisticated conspiracy hatched as soon as the company realised that the Bank’s charge had not been registered, and that Messrs Murphy and Denslow were in on it from the start. That case failed; and what the judge ultimately decided was far removed from the case that had been advanced. The events in issue all took place many years ago. Moreover, in submissions made to the judge (on the basis of the uncorrected transcript of his oral judgment) it was pointed out to the judge that he had not made a finding that Mr Murphy did not believe that he was being told the truth by the company; and it was also suggested to the judge that if he had intended to find that Mr Murphy knew that the amount secured by the Hayward charge was less than the proceeds of sale, then there was no evidential basis for that finding. In correcting the transcript the judge watered down what might have appeared to have been his finding, finding merely that Mr Murphy did not know the amount secured by the Hayward charge. He did not correct the transcript to make a finding that Mr Murphy had no genuine belief that he had been told the truth. Since the judge declined to alter his judgment in that respect that is in my judgment an additional reason why it would not be fair to allow a second attempt to prove dishonesty, when the first attempt failed.

By cross-appeal the Respondents raised an argument about the date from which the judge awarded interest. However, since I would allow the appeal that question does not arise.

I agree.

I also agree. Mr Stewart QC naturally laid much emphasis on the reluctance this court should adopt in reversing a finding of fact by a trial judge about the party’s state of mind when the judge had the advantage of seeing the relevant party giving evidence. He cited paragraph 43 of Twinsectra Ltd v Yardley [2002] 2 AC 164 where Lord Hoffmann said that this court should only take such a course in exceptional circumstances.

It is to be noted that Lord Hoffmann’s critical remarks were made in a case in which this court found a party to be dishonest when the judge had not. This case is precisely the opposite way round and a finding of dishonesty in respect of a solicitor is an extremely serious matter. In a case in which a judge has failed to address expressly the solicitors’ evidence that they thought the Hayward charge amounted to more than the proceeds of sale and failed to say that he disbelieved them, a finding of dishonesty is, in my view, insufficiently secure, especially when no motive for such dishonesty has ever been suggested.

I agree with my Lord that this court cannot positively conclude in those circumstances that Mr Murphy and Mr Denslow were, in fact, honest. There is thus not the kind of reversal of which Lord Hoffmann was critical in Twinsectra. The case is merely a case of “not proven” but for the reasons given by my Lord it is not appropriate to order a retrial.