UCB Group Ltd. v Hedworth

A lender is put on inquiry about possible undue influence according to its knowledge of the purpose of the advance. A joint loan for an apparently joint purpose will not ordinarily put the lender on inquiry. The position may differ where the lender knows that the loan serves the husband's distinct purposes. Whether refinancing a potentially voidable earlier charge puts the lender on inquiry requires investigation of the full facts.

A security voidable from its inception is ineffective against the person entitled to avoid it. A lender who provides purchase money but receives such a security may be subrogated to the unpaid vendor's lien. Successive subrogation is available where reason and justice require it, including to prevent the owner receiving a windfall from the discharge of secured purchase-money debt.

UCB Group Ltd obtained a possession order over Hause Farm under an all-moneys legal charge executed by Mrs Gillian Hedworth and her husband. Mrs Hedworth alleged that her husband had procured her signature through undue influence or misrepresentation. Mr Recorder Narayan rejected her evidence and ordered possession, but decided none of UCB's alternative claims based on subrogation.

Mrs Hedworth appealed from Carlisle County Court. UCB sought to uphold the order on the alternative grounds that it had not been put on inquiry, that it was subrogated to Barclays' earlier charge, or that it was successively subrogated to the vendors' unpaid purchase-money lien. The Court of Appeal considered those alternatives on assumptions favourable to Mrs Hedworth because the recorder had not made the necessary factual findings.

1. Appeal allowed in part. Jonathan Parker LJ held that the recorder's rejection of Mrs Hedworth's evidence could not stand. Although the recorder could find that she would have asked questions before signing, he had to explain properly why he rejected her uncontradicted evidence. His superficial reasoning failed to discharge the judicial function. A retrial would therefore have been necessary unless UCB succeeded on its respondent's notice.

2. Whether UCB was put on inquiry depended on its state of mind and its understanding of the purpose of the advance. A joint advance for an apparently joint purpose will ordinarily fall outside the category requiring inquiry. Nevertheless, the court could not conclude without factual findings that refinancing the Barclays indebtedness necessarily fell on that side of the line. The possible voidability of the earlier charge and the surrounding facts required proper investigation. UCB's second ground was rejected.

3. On the assumed facts, the Barclays charge was voidable against Mrs Hedworth because of undue influence or misrepresentation, UCB was put on inquiry, and the prescribed precautions had not been taken. Conveyancing principles concerning the instantaneous acquisition and charging of property did not extinguish her right to avoid the charge. A security voidable from its inception is unenforceable from its inception against the person entitled to avoid it. It differs from a security which is fully effective when granted but may later become ineffective through non-registration. UCB's direct subrogation grounds were rejected.

4. UCB succeeded through successive subrogation. Barclays had provided £132,906.75 towards the purchase price but, on the assumed facts, received an ineffective security. Barclays was therefore taken to have preserved the vendors' unpaid purchase-money lien. UCB later discharged that purchase-money indebtedness while expecting effective security. The principle recognised in Castle Phillips Finance v Piddington applied, and reason and justice required UCB to obtain Barclays' security rights. Otherwise Mrs Hedworth would receive a windfall.

5. Longmore LJ agreed and added that no apportionment among the five purchased properties was required. The unpaid vendor's lien could have been enforced for the full amount against any one of them, including Hause Farm. Kennedy LJ also agreed with Jonathan Parker LJ. The court unanimously declared an equitable charge over Hause Farm securing £132,906.75, interest and costs, and granted enforcement relief including possession.

1. Court of Appeal (Civil Division): The appeal was allowed in part. The possession order could not be upheld on the recorder's reasoning, but UCB established an equitable charge through successive subrogation. The court ordered enforcement relief, including possession.
2. Carlisle County Court: Mr Recorder Narayan rejected Mrs Hedworth's allegations of undue influence and misrepresentation and made a possession order on 1 February 2002. He made no findings on UCB's alternative subrogation grounds.