First National Bank Plc v Achampong & Ors

Where a lender is put on inquiry because a surety’s relationship with the debtor is non-commercial, it must take reasonable steps to satisfy itself that the surety’s consent was properly obtained. Mere knowledge that a solicitor acted for the surety is ordinarily insufficient. The lender generally needs reasonable grounds that the solicitor was instructed to advise on the nature and effect of the transaction, together with confirmation that the advice was given. Separate representation is not generally essential. A charge ineffective against one co-owner may nevertheless create an equitable charge over the other’s beneficial share and sever a beneficial joint tenancy under section 63(1) of the Law of Property Act 1925. On an application for sale under sections 14 and 15 of the Trusts of Land and Appointment of Trustees Act 1996, the secured creditor’s interest must be properly weighed.

The bank advanced £51,500 secured by a legal charge over a jointly owned matrimonial home. The transaction was for the business of a relative in Ghana. The trial judge found that Mrs Achampong signed the charge under her husband’s undue influence, that the bank was put on inquiry, and that it failed to take reasonable steps to ensure that she understood the risks. He set the charge aside against her, dismissed the possession claim, and refused the bank’s alternative case based on section 63 of the Law of Property Act 1925. He also indicated that he would refuse a sale under sections 14 and 15 of the Trusts of Land and Appointment of Trustees Act 1996. The bank appealed on the notice and solicitor issues, the effect of the charge on the husband’s beneficial share, and the proposed sale.

Blackburne J, with whom Arden LJ agreed, allowed the appeal in part and dismissed it in part.

1. The non-commercial relationship between the debtor and surety put the bank on inquiry. The principle in Barclays Bank plc v O’Brien [1994] 1 AC 180, as developed in Royal Bank of Scotland plc v Etridge (No 2) [2002] 2AC 773, was not confined to a wife guaranteeing her husband’s debts. It applied even though the undue influence came from the wife’s co-surety husband rather than from the principal debtor.
2. Once on inquiry, the bank had to take reasonable steps to satisfy itself that Mrs Achampong’s consent had been properly obtained. Whether it had done so was a question of fact. Mere knowledge that a solicitor acted for the surety was normally insufficient. In the absence of special circumstances, it was sufficient if the bank knew that the solicitor had been instructed to give advice on the nature and effect of the transaction and had received confirmation that the advice had been given. Here the bank had no such knowledge or confirmation. Mr Pallis had not separately advised Mrs Achampong, and the trial judge was entitled to find that the bank had constructive notice of the undue influence.
3. Separate representation was not generally required. A solicitor could act for both debtor and surety in an ordinary case, but the lender still needed reasonable grounds for believing that the solicitor’s instructions included appropriate advice to the surety. The bank therefore failed on its first ground of appeal.
4. Under section 63(1) of the Law of Property Act 1925, the charge was ineffective against Mrs Achampong but effective to create an equitable charge over Mr Achampong’s beneficial half-share. It also severed any beneficial joint tenancy. The trial judge was wrong to reject the bank’s alternative claim. The court followed Ahmed v Kendrick and anr (1987) 56 P&CR 120 and the view in Williams & Glyn’s Bank v Boland [1981] AC 487 that Cedar Holding Ltd v Green [1981] Ch 129 was wrongly decided.
5. In exercising the discretion under sections 14 and 15 of the Trusts of Land and Appointment of Trustees Act 1996, the court had to consider the matters in section 15(1), including the secured creditor’s interests. The trial judge failed to give proper weight to the bank’s position, wrongly relied on its delay, and attached weight to the absence of recovery proceedings against the other debtors without supporting evidence. The matrimonial-home purpose had effectively ended after the parties’ prolonged separation. The welfare of the minor occupants could be relevant, but no evidence showed how a sale would affect them. The bank’s continuing loss and the increasing debt made an order for sale appropriate, consistent with Bank of Ireland Home Mortgages Ltd v Bell & anr [2001] 2AER (Comm) 920.
6. The court ordered a sale so that the bank could realise its charge over the husband’s beneficial half-share. Practical directions were left to the county court. There was no order as to costs.

• Court of Appeal (Civil Division) — In [2003] EWCA Civ 487, the appeal was allowed in part and dismissed in part. The court upheld the setting aside of the charge against Mrs Achampong, declared an equitable charge over Mr Achampong’s beneficial half-share, and ordered a sale.
• Shoreditch County Court — On 30 August 2002, Judge Cotran dismissed the bank’s possession claim, set aside the charge against Mrs Achampong for undue influence, refused the section 63 alternative claim, and indicated that he would refuse an order for sale.