First National Bank Plc v Achampong & Ors

The Court of Appeal held that the bank had been put on inquiry by the non-commercial nature of the transaction and that it failed to take reasonable steps to ensure that Mrs Achampong had received appropriate legal advice before executing a legal charge over the matrimonial home. The bank could not rely merely on the fact that a solicitor appeared to act for the borrowers; there was no confirmation that the solicitor had advised Mrs Achampong on the risks. The judge below was correct to set aside the charge as against Mrs Achampong for undue influence.

However, the court held that, by force of section 63 of the Law of Property Act 1925, the legal charge was nevertheless effective to create an equitable charge over Mr Achampong’s beneficial half-share and to sever any beneficial joint tenancy. The Court of Appeal therefore allowed the bank’s alternative claim in part and ordered that an order for sale should be made under the Trusts of Land and Appointment of Trustees Act 1996, having regard to the bank’s interest and the practical impossibility of recovery otherwise.

Background and parties. The bank advanced funds secured by a legal charge over 19 Knightland Road, a jointly owned matrimonial home, to secure what was understood to be a loan for the business of the third defendant in Ghana. The charge was executed in 1989. Mrs Achampong later alleged her signature had been procured by undue influence exerted by her husband and counterclaimed for a declaration that the charge be set aside.

Procedural posture. The Shoreditch County Court (Judge Cotran) found that Mrs Achampong’s execution of the legal charge had been procured by undue influence and set the charge aside and ordered rectification of the charges register. The bank appealed to the Court of Appeal.

Nature of the claim. The bank sought possession and payment of monies due; alternatively, relying on section 63 of the Law of Property Act 1925, it sought a declaration that it held an equitable charge over Mr Achampong’s beneficial interest, an enquiry as to quantum and an order for sale. Mrs Achampong counterclaimed to set aside the charge and for consequential relief.

Issues framed. The court identified five issues: (1) whether Mrs Achampong’s execution was procured by undue influence; (2) whether the bank was put on inquiry; (3) if so, whether the bank took reasonable steps to satisfy itself that her consent was properly obtained; (4) whether, alternatively, section 63 produced an equitable charge over Mr Achampong’s beneficial half-share; and (5) whether an order for sale should be made under the 1996 Act and on what terms.

Court’s reasoning and conclusions.

• The Court of Appeal accepted the judge’s findings that Mrs Achampong had been pressured by her husband and that the bank was put on inquiry because the loan was for the third defendant’s business and the property was the matrimonial home.
• Applying the principles in Royal Bank of Scotland v Etridge (No 2), the court held that it was insufficient for the bank merely to know that a solicitor (Mr Pallis) was acting for the parties; the bank had to have reasonable grounds to believe that the solicitor had been instructed to advise the wife about the nature and effect of the transaction and, for past transactions, to have received confirmation where practicable. No such assurance or confirmation existed here and the solicitor’s role was found to be largely formal.
• Consequently the bank was fixed with constructive notice of the undue influence and the charge was ineffective as against Mrs Achampong.
• On the bank’s alternative case the court held that section 63 of the Law of Property Act 1925 was apt to create an equitable charge over Mr Achampong’s beneficial half-share and to sever any beneficial joint tenancy, following the approach in Ahmed v Kendrick. The county court judge was wrong to refuse the declaration sought under section 63.
• On discretion under the Trusts of Land and Appointment of Trustees Act 1996, the Court of Appeal concluded that the county court had wrongly exercised its discretion: it had given undue weight to the bank’s delay and insufficient weight to the bank’s interest as a secured creditor. The appellate court ordered sale to enable the bank to realise its equitable charge over the husband’s half-share.

Appeal allowed in part and dismissed in part. The Court of Appeal upheld the county court’s finding of undue influence and that the bank had been put on inquiry and had failed to take reasonable steps to ensure that Mrs Achampong received appropriate advice; accordingly the legal charge was set aside as against her. The court held, however, that section 63 of the Law of Property Act 1925 operated to create an equitable charge over Mr Achampong’s beneficial half-share and sever any beneficial joint tenancy, and that the county court had erred in refusing a sale under the Trusts of Land and Appointment of Trustees Act 1996: accordingly the appeal succeeded in part and the court ordered sale.

On appeal from the Shoreditch County Court (His Honour Judge Cotran), judgment below dated 30 August 2002. The Court of Appeal (Arden LJ and Blackburne J) allowed the appeal in part and dismissed it in part, [2003] EWCA Civ 487, judgment handed down 31 March 2003. Leave to appeal had been granted by a single Lord Justice.