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

This is a case about the remedy of subrogation as it affects the priority of charges.

It has been argued before me on behalf of the claimant and appellant, Anfield (UK) Limited (“Anfield”), and Bank of Scotland Plc (“the Bank”), the first defendant. The case arises out of loans to the second defendant, Mr Siddiqui, a bankrupt, who is the registered proprietor of property (“the property”) at Stepney Green in London. Neither Mr Siddiqui nor his trustee in bankruptcy appeared at trial or on the appeal. There is another party to the action, London Scottish Finance Limited (“LSFL”), joined after trial pursuant to an order of the trial judge on 3^rd March 2010. However LSFL (which is in administration) was not represented at and did not participate in the appeal.

The following items appear on the charges register within the register of title in respect of the property, in the following order:

The Bank lent Mr Siddiqui the money to redeem the Halifax Charge and in September 2006 received in return an executed charge (“the 2006 Charge”) capable of being registered as a legal charge. However, the Bank failed to register the 2006 Charge. Anfield obtained and registered its charging order. Subsequently, the Bank caused its Unilateral Notice to be entered in respect of the 2006 Charge.

The Bank claimed to be entitled to invoke the remedy of subrogation to the Halifax Charge. If it was so entitled, it would rank in priority to Anfield’s equitable registered charge at (3) and LSFL’s registered legal charge at (2).

By Order dated 28^th January 2010, Her Honour Judge Marshall QC, sitting at Central London County Court, held that the Bank was entitled to be subrogated to and registered as proprietor of the Halifax Charge to the extent of the moneys advanced to discharge it.

Anfield appeals against that decision, relying on a similar reasoning to that of Walton J expressed in Burston Finance v. Speirway Ltd [1974] 1 WLR 1648. Anfield’s difficulty is that in Cheltenham & Gloucester plc v. Appleyard [2004] EWCA 291, Neuberger LJ, giving the judgment of the full Court of Appeal, comprising also Lord Phillips of Worth Matravers MR and Kennedy LJ, expressed the view of the Court that such reasoning was wrong in principle.

Mr Lander on behalf of Anfield submitted that (a) the facts of Appleyard are distinguishable from those of the present case, (b) the expression of opinion on the issue now arising was obiter and (c) the Court of Appeal’s opinion should not be followed.

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.

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].

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”.

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.

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.

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.

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.

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.