In 2006, Drs Ravindra and Salma Sondhi applied to the claimant (AIB) for a loan of £3.3m, to be secured against their private home, in order to provide finance for their business. The application stated that the Sondhis’ home was worth £4.5m but was subject to an existing mortgage in favour of Barclays Bank to secure an outstanding loan of £1.5m. AIB agreed to the loan but required security over the Sondhis’ home in the form of first legal charge. AIB instructed the defendant (MRC) to act for it in connection with the remortgage and provided MRC with a facility letter which stipulated the requirement of a first legal charge in the bank’s standard form.
On 28 July 2006, MRC sought a redemption statement from Barclays as at 31 July 2006 (the intended date for completion). Barclays refused to give a redemption value because the requisite three days were not provided. It did, however, fax a letter on 1 August 2006 to MRC attaching two documents entitled ‘Mortgage Valuation Statement’ in respect of the two accounts in respect of their loan to the Sondhis. MRC omitted to appreciate that the indebtedness was spread over two accounts and therefore proceeded to pay only £1,235,785.07 of the monies transferred to their client account from AIB on 1 August 2006 and thereafter transferred the balance to the Sondhis. Consequently, insufficient funds to discharge Barclays’ charge were transferred and AIB eventually entered into a deed of postponement by which Barclays permitted AIB’s charge to be registered as a second charge on the property and limited its priority in respect of its own charge to £273,777.42, plus interest, costs and expenses.
On 14 July 2010 AIB obtained judgment against the Sondhis for over £3.5m and an order for possession of the property. The property was subsequently sold for £1.2m, of which just over £300,000 was paid to Barclays in satisfaction of their charge.
MRC accepted that it was negligent in failing to obtain a first legal charge. However, AIB accepted that had its instructions been followed it would have made the loan to the Sondhis and suffered loss as a consequence of their default, so that the only difference in position is that it would have had an additional £300,000 worth of security for its loan. AIB, therefore, made its principal claim for breach of trust and sought restoration of the entire fund transferred to MRC’s client account. MRC denied that it acted in breach of trust on the basis that it was authorised to release the advance monies on completion of the remortgage transaction. In the alternative MRC sought relief from liability under s61 of the Trustee Act 1925.
On a hearing of preliminary issues, the trial judge found that MRC had acted in breach of trust to the extent that it released to the Sondhis the amount of £273,774.42 but rejected the claim that the release of the entire £3.3m advance was made in breach of trust. AIB and MRC brought consolidated appeals against these orders.
- (1) Where the existing lender has instructed a solicitor to act on its behalf in the remortgage transaction, obtaining a redemption statement from the bank, coupled with an undertaking from the bank’s solicitors that the advance will be used in redemption of the existing charge (or where the bank has not instructed a solicitor, an unconditional confirmation from the bank) is an essential element of the solicitor’s authority without which they cannot complete the transaction. Wherecompletion takes place, the failure to pay the bank sufficient monies to redeem would be a breach of retainer but not a breach of trust. However, if completion does not take place the solicitors have parted with trust monies without authority and thus acted in breach of trust. Accordingly, MRC committed a breach of trust for which equitable compensation could be awarded by the court (paras 40-41 and 43).
- (2) Equitable compensation, although not employing common law rules of causation and remoteness, does have the capacity to recognise what loss the beneficiary has actually suffered and to base compensation recoverable on the proper causal connection between breach and the eventual loss (para 47). Accordingly, the trial judge’s order, calculating equitable compensation in the sum of £323,501.38 was affirmed, because the breach of trust related to the unauthorised pre-completion mortgage advance and not the failure to obtain a first charge, the court had to take account of the security AIB was eventually able to obtain (paras 50-51).
- (3) In the circumstances, MRC did not seek relief under s61 in respect of its failure to pay the additional £273,777.42 to Barclays which it accepted was both negligent and unreasonable.